B.Com 1st Sem.
Subject- Business Law
SYLLABUS
Class – B.Com. I Sem.
Subject – Business Law
UNIT – I
UNIT – II
UNIT – III
UNIT – IV
UNIT – V
Indian Contract Act 1872- Definitions, Nature of Contract,
Offer & Acceptance, Capacity of Parties to Contract, Free
Consent and Consideration, Expressly declared void
agreement, Performance of contracts.
Breach of Contract, Remedies for breach of Contract,
Indemnity and Guarantee Contracts. Special ContractsBailment, Pledge and Agency.
Limited Liabilities Partnership Act, 2008, Negotiable
Instrument Act, 1881- Definition, Features, Promissory note,
Bill of Exchange and Cheques, Holder and Holder in Due
Course. Crossing of Cheque, Types of Crossing, Dishonor and
Discharge of Negotiable Instruments.
Consumer Protection Act 1986- Main Provisions. Consumer
Disputes, Redressal Machinery.
Foreign Exchange Management Act 2000 (FEMA) - Objective
and Main Provisions, Introduction to Intellectual Property
Right Act- Copyright, Patent and Trademark.
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B.Com 1st Sem.
Subject- Business Law
Unit-I
Subject: Indian Contract Act
The Indian Contract Act 1872
The law of contract in India contained in Indian Contract Act 1872, which is based on English common
Law. It extends to whole of India except the state of Jammu and Kashmir. It came into force on the first
Sep. 1872. The Act lays down general principles governing all contracts, but not the rights and duties of
the parties. The rights and duties are decided by the parties themselves.
Scheme of the Act: - The scheme can be divided into two main groups:
1.
General principles of the law of contract.
2.
Specific kinds of contracts viz:
a. Indemnity and Guarantee
b. Contracts of Bailment and Pledge
c. Contract of Agency.
Meaning and Definition of an Agreement:
An Agreement consists of an offer by one party and its acceptance by other. In other words, an
agreement comes into existence only when one party makes a proposal to the other party and that
other party gives acceptance.
Agreement = Proposal + Acceptance of proposal
According to Section 2(e) of Indian Contract Act 1872 “Every promise and every set of promises,
forming the consideration for each other is an obligation.”
Meaning and Definition of a Contract:
A contract is a promise or set of promises for the breach of which the law gives a remedy or the
performance of which the law in some way recognize as duty. In other words, a contract is an
agreement the object of which is to create a legal obligation. The contract consists of two elements:
1. An agreement and
2. Legal Obligation i.e. enforceability by law.
Contract = an Agreement + enforceability by law.
According to Section 2(h) of the Indian Contract Act 1872 “An agreement enforceable by law is a
contract.”
Essential Elements of a valid Contract:
1. Offer and Acceptance: There must be a “lawful offer” and a “lawful acceptance” of the offer,
thus resulting in an agreement.
2. Intention to create legal relation: There must be an intention among the parties that the
agreement should be attached by legal consequences and create legal obligations. Social
agreements do not contemplate legal relations, and so they do not give rise to a contract.
3. Lawful Considerations: An agreement is legally enforceable only when each of the parties to it,
give something and get something. This something is the price for the promise and is called
“Consideration”. Only those considerations are valid which ‘Lawful’
4. Capacity of parties: The parties to an agreement must be competent to contract, otherwise it
cannot be enforced by a court. To be competent, the parties must be on majority age and of
sound mind and must not be disqualified from contracting by any law to which they are subject.
5. Free Consent: “Consent “means that the parties must have agreed upon the same thing in the
same sense. Consent is not enough for making a contract. That to must be free. It is said to be
free when it is not caused by1. Coercion, or (i) undue influence, or (iii) fraud, or (IV) misrepresentation, or (v) mistake.
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B.Com 1st Sem.
Subject- Business Law
6. Lawful object: For the formation of a valid contract, it is also necessary that the parties to an
agreement must agree for a lawful object. The object must not be fraud or illegal or immoral or
must not imply injury to the person or property of other.
7. Writing and Registration: Generally the contracts may be oral or written. But in special cases,
it lays down that the agreement must be in writing or registered to be valid.
8. Certainty: Any agreement can be enforced if its meaning is certain or capable of being made
certain agreements the meaning of which is not certain, are void.
9. Possibility of performance: The terms of the agreement must also be capable of performance
physically as well as legally.
10. Not expressly declared void: The agreement must not have been expressly declared void
under the act. There are some types of agreements which have been expressly declared to be
void.
Kinds or classification of Contracts
A. On the basis of Enforceability
1. Valid Contract: A valid contract is an agreement enforceable by law. An agreement becomes
enforceable by law when all the essential elements of a valid contract (as per section 10 of the
act) are present.
2. Voidable Contract: “An agreement which is enforceable by law at the option of one or more of
the parties, but not at the option of one or more of the other, is a voidable contract.”
3. Void Contract: Void means not binding in law. It is valid at the time of making it but becomes
void subsequently due to change in circumstances.
Void Agreement:” An agreement not enforceable by law is said to be void”
Thus a void
agreement does not give rise to any legal consequences and is void ab initio.
4. Unenforceable contract: It is one which is valid in it, but is not capable of being enforced in a
court of law because of some technical defect such as absence of writing, registration requisite
stamp.
5. Illegal or unlawful contract: An agreement which is expressly or impliedly prohibited or
forbidden by law. It is void ab initio.
B. On the basis of Creation:
1. Express Contract: It is one in which parties make oral written declaration of the terms and
conditions of the contract.
2. Implied Contract: It is one in which evidence of contract is gathered from acts and conduct of
the parties and not from written or spoken words of parties.
3. Constructive or Quasi Contract: It is not a contract made intentionally by the parties by
exchange of promises. It is a contract imposed by the law. The basis of this contract is that no
one can be allowed to enrich himself at the cost of the other.
On the basis of Execution
1. Executed Contract: When both the parties to a contract have completely performed their share
of obligations and nothing remains to be done by either party under the contract.
2. Executory Contract: When either parties have still to perform their share of obligation in to or
there remains something to be done under the contract on both sides.
Capacities of Parties
Meaning of Capacity to Contract
Capacity or competence to contract means legal capacity of parties to enter into a contract. In
other words, it is the capacity of parties to enter into a legally binding contract.
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B.Com 1st Sem.
Subject- Business Law
Who are Competent to Contract?
Every person is legally competent to contract if he fulfills the following three condition :
i.
He has attained the age of majority;
ii.
He is of sound mind; and.
iii.
He is not disqualified from contracting by any other law to which he is subject.
1) MINORS
Any person, who has not attained the age of majority prescribed by law, is known as minor.
Section 3 of the Indian Majority Act prescribes the age limit for majority and says a minor is a
person who has not completed eighteen years of age. But the same Act also mentions that in the
following two cases a person attains majority only after he completes his age of twenty one years :
(i)
Where a Court has appointed guardian of a minor’s person or property or both (under the
Guardians and Wards Act, 1890); or
(ii)
Where the minor’s property has been placed under the superintendence of a Court of
wards.
2) PERSONS OF UNSOUND MIND
A person is said to be of sound mind for the purpose of making a contract (a) if he is capable of
understanding the contract at the time of making it, and (b) if he is capable of making a rational
judgment as to the effect upon his interests.
Types of Persons of Unsound Mind and their Contracts:
1.
Idiot
2.
Lunatic
3.
Delirious persons
4.
Drunken or intoxicated persons
5.
Hypnotized persons
6.
Mental decay
3) PERSONS DISQUALIFIED BY OTHER LAWS
There are certain persons who are disqualified from contracting by the other laws of our country. They
are as under:
1.
Alien enemy
2.
Foreign sovereigns, diplomatic staff etc.
3.
Corporations and companies
4.
Insolvents
5.
Convicts
Rules /effects as to or Nature of Minor’s Agreements:
1. Void ab-initio: - Minor’s agreement is absolutely void from very beginning, i.e. void ab- initio. It
is nullity in the eye of law. An agreement with minor, therefore, can never be enforced by law.
2. Minor can be a promise or beneficiary: - A minor can enforce such agreements in which he is
a beneficiary or promise and does not create any obligation on his part.
3. No ratification:- A minor cannot be ratify even after attaining the age majority because void
agreement cannot be ratified.
4. Restitution/ Compensation possible: - If a minor has received benefits under an agreement
from the other party, the Court may require the minor to restore the benefit (so far as may be),
to the other party at the time of rescission of the agreement. The minor may be asked to restore
the benefit to the extent he or his estate has been benefited.
5. Contract by parent/ guardian/ manager: - A minor’s parent/ guardian/ manager can enter
into contract on behalf of the minor provided:
i. The parent/ guardian/ manager acts within the scope of his authority; and
ii. The contract is for the benefit of the minor.
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B.Com 1st Sem.
Subject- Business Law
6. No liability of parents: - The parents (guardian) of a minor are not liable for agreements made
by their minor ward. However, they can be held liable if the minor makes agreement as their
authorized.
7. Minor as an agent: - A minor is not entitled to employ an agent; he can be an agent himself for
someone else. As an agent he ca represent the principal, and bind him for his acts done in the
course of agency. But the minor is not responsible to the principal for his acts.
8. Minor and insolvency: - A minor cannot be declared insolvent because he is not competent to
contract.
9. Minor as joint Promisor: - A minor can be a joint promisor with a major, but the minor cannot
be held liable under the promise to the promises as well as to his co-promisor. But the major
promise cannot escape liability. The major joint promisor can be forced to perform the promise.
10. Minor shareholder: - A minor can become a shareholder or member of a company if (a) the
shares are fully paid up and (b) the articles of association do not prohibit so.
11. Liability for necessaries of life: - A minor is incompetent to contract. A minor, therefore, is not
personally liable for the payment of price of necessaries of life supplied to him or to his legal
dependents. However, the person who has furnished such supplies is entitled to be reimbursed
from the property of the minor.
12. Minor Partner: - According to the Partnership Act, 1932, a minor cannot make a contract of
partnership though he may be admitted to its benefits with the consent of all the partners. A
minor partner cannot be made personally liable for any obligation of the firm, but his share in
the firm’s property can be made liable.
13. No estoppels against minor: - The term ‘estoppels’ means prevention of a claim. When a
minor enter into contract, representing that he is a major, but in reality he is not, then later on
he can plead his minority as a defence and cannot be estopped (prevent) from doing so.
Definition of Consideration
Consideration is one of the essential elements of a valid contract. The term “Consideration” means
something in return i.e. quid –pro-quo. Consideration must result in a benefit to the promiser, & a
detriment or loss to the promisee or a detriment to both. Without consideration a contract is void or
nude i.e. nudum pactum
Section 2(d) of the Indian Contract act, 1872 defines Consideration as follows:
“ When, at the desire of the promiser ,the promisee or any other person has done or abstained from
doing, or does or abstains from doing ,or promises to do or abstain from doing something, such act or
abstinence or promise is called a consideration for the promise.”
ESSENTIAL ELEMENTS OF A VALID CONSIDERATION
 It must move at the desire of the promisor: Consideration must have been done at the desire
or request of the promisor & not at the desire of a third party or without the desire of the
promisor.
 It may move from the promise or any other person: An act constituting consideration may be
done by the promise himself or any other person. Thus, it is immaterial who furnishes the
consideration & therefore may move from the promisee or any other person. This means that
even a stranger to the consideration can sue on a contract, provided he is a party to the
contract (Case Chinayya V/s Ramayya)
 It may be Past , Present or Future:
 Past Consideration: The consideration which has already move before the formation of
agreement.
 Present consideration: The consideration which moves simultaneously with the promise.
 Future Consideration: The consideration which is to be moved after the formation of
agreement.
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B.Com 1st Sem.
Subject- Business Law
It must be of some value: The consideration need not be adequate to the promise but it must be of
some value in the eye of the law.
It must be real & not illusory: Ex. A promise to put life into the B’s dead wife & B promises to pay
Rs 10,000. This agreement is void because consideration is physically impossible to perform.
Must be Something other than the promisor’s Existing obligation: Consideration must be
something which the promisor is not already bound to do because a promise to do what a promisor
is already bound to do adds nothing to the existing obligation.
It must not be illegal, immoral or opposed to public policy.
A CONTRACT WITHOUT CONSIDERATION IS VOID
The general rule is “An Agreement made without consideration is void”. Sec 25 & 185 deals with the
Exceptions to this rule. These cases are:
1) Love & Affection: A written & registered agreement based on natural love & affection between near
relatives is enforceable even if it is without consideration.
Ex: X, for natural love & affection, promises to give his son, Y, Rs 1000. X puts his promise to Y in writing
& registers it. This is a contract.
2) Compensation for voluntary services: A promise to compensate wholly or partly, a person who has
already voluntarily done something for the promisor, is enforceable even without consideration.
Ex: A finds B’s purse & gives it to him. B promises to give Rs 50 to A. This is a contract.
3) Promise to pay a Time barred debt: A promise by a Debtor to pay a time-barred debt if it is made in
writing & is signed by the debtor or by his agent is enforceable.
4) Completed gifts: There need not be consideration in case of completed gifts.
5) Agency: No consideration is necessary to create an Agency.
6) Contribution to Charity
STRANGER TO A CONTRACT
Though a stranger to consideration can use because the consideration can be furnished or
supplied by any person whether he is the promises or not, but a stranger to a contract cannot sue because
of the absence of privity of contract (i.e. relationship subsisting between the parties to a contract.
Topic : Free Consent
MEANING OF CONSENT
Two or more persons are said to consent when they agree upon the same ting in the same sense at the
same time.
MEANING OF FREE CONSENT
Sec. 14 describes the cases when the consent is not free. It lays down that consent is not free if it
is caused by coercion, undue influence, fraud, misrepresentation, etc. if the consent is not free, the
agreement is avoidable at the option of the party whose consent was not free.
1)
COERCION
Coercion simply means forcing a person to enter in to a contract. Sec. 15 defines coercion as,
“Committing or threatening to commit, any act forbidden by the Indian Penal Code, or unlawful
detaining or threatening to detain, any property, to the prejudice of any person whatever with the
intention of causing any person to enter into an agreement”.
The essential elements of coercion are
(1)
Committing or threatening to commit any act forbidden by Indian Penal Code.
(2)
Unlawful detaining or threatening to detain any property.
(3)
The act of coercion may be directed at any person and not necessarily at the other party to
the agreement.
(4)
The act of coercion must be done with the object of inducing or compelling any person to
enter into an agreement.
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B.Com 1st Sem.
Subject- Business Law
2)
UNDUE INFLUENCE : It is kind of moral coercion.
Sec. 16(1) defines undue influence as, “A contract is said to be induced by undue influence
where the relations subsisting between the parties are such that one of the parties is in a position to
dominate the will of other and uses that position to obtain an unfair advantage over the other”.
(a)
Where he holds a real or apparent authority over the other e.g., in the relationship between
master and servant.
(b)
Where he stands in fiduciary relation to the other. It implies a relationship of mutual trust and
confidence.
(c)
Where a contract is made with a person whose mental capacity is affected by reason of age,
illness, or mental or bodily distress.
Any innocent or unintentional false statement or assertion of fact made by one party to the
other during the course of negotiation of a contract is called a misrepresentation.
3)
MISREPRESENTATION
As per Sec. 18, misrepresentation is a wrong statement of fact made innocently, i.e.,
without any intention to deceive the other party. It may be caused.
(1)
By positive statement.
(2)
By breach of duty.
(3)
By mistake regarding the subject matter of the agreement.
Essential of misrepresentation
(1)
There must be a representation or omission of a material fact.
(2)
The representation or omission of duty must be made with a view to inducing the other
party to enter into contract.
(3)
The representation or omission of duty must have induced the party to enter into contract.
(4)
The representation must be wrong but the party making the representation should not
know that it is wrong.
4)
FRAUD
Fraud is the international misrepresentation or concealment of material facts of an agreement by a
party to or by his agent with an intention to deceive and induce the other party to enter into an
agreement.
Sec. 17 defines fraud as, any of the following acts committed by a party to a contract (or with his
convenience or by his agent) with intention to deceive another party thereto (or his agent) or to induce
him to enter into the contract.
(1)
The suggestion that a fact is true when it is not true by a person who does not believe it be
true.
(2)
The active concealment of the fact by a person having knowledge or belief of the fact.
(3)
A promise made with out any intention to perform it.
(4)
Any other act fitted to deceive.
(5)
Any such act or omission as the law specifically declares to be fraudulent.
5)
MISTAKE
Acc. To Sec. 20 mistake means erroneous belief concerning some fact. The parties are said to
consent when they agree upon the same thing in the same sense. If they do not agree upon the
agreement in the same sense, there will be no contract.
When the consent of one or both the parties to a contract is caused by misconception or
erroneous belief, the contract is said to be induced by mistake.
Mistake may be of following types:
(1)
Mistake of law,
(a)
Mistake of law of the country.
(b)
Mistake of foreign law.
(c)
Mistake of private rights of the parties
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B.Com 1st Sem.
(2)
Subject- Business Law
Mistake of fact,
(A)
Bilateral Mistake :
(1)
Mistake as to subject mater :
(a)
Mistake regarding existence
(b)
Mistake regarding identity
(c)
Mistake regarding title.
(d)
Mistake regarding price
(e)
Mistake regarding quality
(f)
Mistake regarding quantity
(2)
Mistake as to the possibility of performance
(a)
Physical impossibility
(b)
Legal impossibility
(B)
Unilateral Mistake :
(1)
Mistake as to identify of the person contracted with.
(2)
Mistake as to the nature of contract.
Basis of distinction
1. Definition
2. Creation
3. legal rights and
obligations
4. Necessity
5. Legally binding
6. Concept
Distinction between an Agreement and a Contract
Agreement
Contract
Every promise and every set of
An agreement enforceable by law is a
promises forming consideration
contract.
for each other is an agreement
An agreement is created by
Agreement and its enforceability
acceptance of an offer.
together create a contract.
An agreement may not create legal A contract creates legal rights and
rights and obligations of the
obligation between the parities.
parties
No contract is required to make an Valid agreement is necessary for
agreement.
making a contract.
An agreement is not a concluding
A contract is a concluding or legally
or legally binding contact.
binding on the parties.
Agreement is a wider concept and Contract is a narrow concept and it is
includes contacts.
only a specific of agreement.
DISTINCTION BETWEEN VOID AGREEMENT AND VOID CONTRACT
Basis of distinction
Void Agreement
Void Contract
1. Definition
An agreement not enforceable
A contract which cases to be enforceable
by law is said to be void. [Sec.
by law becomes void when it ceases to be
2(g)]
enforceable [Sec. 2(j)]
2. Time when
It is void from very beginning.
It becomes void subsequently due to
becomes void
change in law or change in circumstances.
3. Restitution
Generally no restitution is Restitution may be granted when the
granted, however, the Court contract is discovered to be void or
may on equitable grounds becomes void.
grant restitution in case of
fraud or misrepresentation by
minors.
4. Description in the
Such agreement have been
There is no mention of cases of void
Act
mentioned as void in the Act.
contracts in the Act. They are created by
Agreements without
circumstances and law Courts decide
consideration, agreements with whether they have become void or not.
lawful object or consideration
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B.Com 1st Sem.
Subject- Business Law
and some other agreements
have expressly been declared
to be void.
DISTINCTION BETWEEN VOID AGREEMENT AND VOIDABLE CONTRACT
Basis of
distinction
1.
Definition
2. Period of
validity
3. Legal
existence
4. Change in
status
5. Causes
6. Transfer
of title
7.
Restitution
8. Damages
Void Agreement
Voidable Contract
An agreement not enforceable by law is
said to be void.
It is void from the beginning i.e. void ab
initio
It is nullity, hence, does not exist in the
eye of law.
Status of void agreement does not
change with the change in
circumstances.
A contract enforceable by law at the option of
the aggrieved party, is a voidable contract.
It is valid till it is avoided by the aggrieved
party to the contract.
It has its existence in the eye of law till it is
repudiated.
Status of such contract change when the
aggrieved party elects to avoid it within a
reasonable time. It becomes void when the
aggrieved party elects to rescind it.
A contract is voidable when the consent of the
party is caused by coercion or undue
influence or fraud or misrepresentation.
Any agreement is void when it is made
with incompetent parties or for
unlawful objects and consideration, or
without consideration, or without
consideration or it is expressly
declared to be void under the law.
The party obtaining goods under void
agreement cannot transfer a good title
to the third party.
Parties do not have right to restore the
benefits passed on to the other unless
the parties were unaware of the
impossibility of performance at the
time of agreement or the party to the
agreement was minior.
No party as a right to get compensation
for damages because such agreement
has no legal effect.
The party obtaining goods under voidable
agreement can transfer a good title to the
third party if the third party obtains it in good
faith and for consideration and the aggrieved
party has not avoided the contract before
such transfer.
Generally, right restitution is available if the
party elects to avoid the contract.
If a party rightfully recinds (i.e. puts and end)
the contract, he can claim compensation, he
can claim compensation of damages sustained
by him due to non-fulfilment of the promise.
DISTINCTION BETWEEN VOID AND VOIDABLE CONTRACT
Basis of
Void Contract
Voidable Contract
distinction
1. Definition A contract which ceases to be
A contract which is enforceable by law at the option of
enforceable by law become
the aggrieved party is a voidable contract.
void, when it ceases to be
enforceable.
2. Period of
It remains valid till it does not It remains valid if the aggrieved party does not elect to
validity
cease to be enforceable.
avoid it within a reasonable time.
3. Will of the Its validity is not affected by
Its validity is affected by the will of the aggrieved
party
the will of any party. It is
party. Aggrieved party has option to treat it either
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B.Com 1st Sem.
4. Causes
Subject- Business Law
decided by the Law Court.
Contracts become void due to
change in circumstances or in
the law of land.
binding or repudiate it.
Contract is voidable when the consent of the party is
caused by coercion, undue influence, fraud or
misrepresentation. Sometimes, it may be voidable
under the provisions of the Secs. 39, 53 and 55.
DISTINCTION BETWEEN VOID AND ILLEGAL AGREEMENT
Basis of
distinction
1. Definition
Void Agreement
Illegal Agreement
An agreement not enforceable by law is void.
2. Effect on
collateral
agreement
3. Scope
The agreement collateral to the void agreement is
not necessarily void.
An agreement which is
expressly or impliedly
prohibited by law, is illegal.
The agreement collateral to
an illegal agreement is
always void.
All ill agreements are void.
4. Restitution
All void agreements need not necessarily be illegal
agreements. Hence, the scope is wider than that of
the illegal agreements.
The Court may grant restitution of money
advanced if is minor or if the parties were
unaware of the impossibility of performance of the
agreement.
Restitution of money is not
granted in case of an illegal
agreement.
DIFFERENCE BETWEEN COERCION AND UNDUE INFLUENCE
Basis of
Coercion
Undue influence
distinction
1.
Coercions the committing or
Undue influence is an influence which arises
Definition
threatening to commit, any act
where the relations subsisting between the
forbidden by the I.P.C. or unlawful
parties are such that one of the parties is in a
detaining or threatening to detain any
position to dominate the will of the other and
property with the intention of causing
uses that position to obtain an unfair
any person to enter into an agreement. advantage over the other.
2. Relations In case of coercion, relation between
In case of undue influence, in the relation
the parities is immaterial.
between the parties the parties must be such
that one of them is in a position to dominate
the will of other.
3. Intention Coercion is applied with the intention
It is exerted with the intention to obtain an
of causing any person to enter into an
unfair advantage over the other party.
agreement.
4. Nature of It involves physical force.
It involves moral force.
force
5. Kind of
It involves criminal act.
It does not involve criminal act.
act
6. Direction The coercion may be directed against
Under influence is used against the weaker
any person including a stranger.
party only.
7. Who
It can be exercised by any person. Even It is employed by the person who is in a
exercise
a stranger to contract can exercise it.
position to dominate the will of the other.
8.
A contract caused by coercion, may be
In case of undue influence, the aggrieved
Remedies
avoided by the aggrieved party’s
party may avoided the contract or the Court,
contract. [Sec. 19]
may set aside the contract absolutely or
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B.Com 1st Sem.
Subject- Business Law
conditionally. [Sec. 19 A]
Basis of
distinction
1. Meaning
2. Intention
3. Belief in
the facts
4. Suit for
damage
5. Defence
DISTINCTION BETWEEN FRAUD AND MISREPRESENTATION
Fraud
Misrepresentation
A fraud is an international
misrepresentation or concealment of
material fact to include the other party to
enter into a contract.
Fraud is committed with an intention to
deceive
The person committing of a fraudulent
act does not believe it to be true.
The aggrieved party has right to sue the
other party for damages.
A party cannot set up a defence that the
aggrieved party had means of
discovering the truth except in case of
fraud by concealment or by silence.
An innocent or unintentional
misrepresentation of material facts by one
party fact by one party include the other
party to enter into a contract.
There is no such intention.
The person making misrepresentation
believes in its facts to be true.
The aggrieved party cannot sue for
damages.
In case of misrepresentation the other party
always set up a defence that the aggrieved
party that the aggrieved party had means of
discovering the truth.
DISTINCTION BETWEEN COTANGENT TRACT AND WAGERING AGREEMENT
Basis of distinction
Contingent contract
Wagering agreement
1. Meaning
A contingent contract is contract A wagering agreement is one in
in which the promisor
which one person agrees to pay
undertakes to perform the
certain amount of money to the
contract upon the happening or
other on happening or nonnon-happening of an event,
happening of a specific event.
which is collateral to the
contract.
2. Nature of event
The event is collateral to the
Even is the sole determining
contract, i.e. not a part of
factor.
promise or consideration of the
contract.
3. Reciprocal promise
There is no reciprocal promise is The wagering agreement consist
a contingent contract.
of reciprocal promise.
4. Interest in the subject
The parties are interested in the The parties to wagering
matter
subject-matter of such contracts. agreement have no other
Therefore, the happening or
interest in the subject matter of
non-happening of the event is
the agreement except the
material for them.
winning or losing the money at
stake.
5. Validity
A contingent contract is valid
A wagering agreement void
contract.
agreement. In the State of
Maharastra and Gujarat it is
illegal.
6. Nature of contract
All contingent contracts are not
All wagering agreements are
wagering agreements because
contingent agreements because
all contingent contracts are not
their performance is dependent
void.
upon uncertain future events.
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UNIT-II
DISCHARGE OF CONTRACT
When the rights and obligations arising out of a contract are extinguished, the contract is said to be
discharged or terminated. A contract may be discharged by any of the following ways:
1.
By performance – Actual or Attempted.
2.
By mutual consent or agreement.
3.
By subsequent or supervening impossibility or illegality.
4.
By lapse of time.
5.
By operation of law.
6.
By breach of contract.
Discharge by PerformancePerformance of a contract is the most popular manner of discharge of a contract. The performance may
be either Actual performance or Attempted performance.
A. Actual performance:-When each party fulfils his obligations arising out of the contract within the
time and in a manner prescribed , it is called the actual performance and the contract comes to an end.
B. Attempted performance or Tender:-When the promisor offers to perform his obligation, but is
unable to do so because the promise does not accept the performance, it is called ” Attempted
Performance” or “tender”. Thus tender is not actual performance but is only an offer to perform the
obligation under the contract. A valid tender of performance is equivalent to performance.
Essentials of a valid tender:-if it fulfils the following conditions:1.
It must be unconditional. If A who is a debtor of company B, offers to pay if shares are allotted
to him at par. IT is not a tender.
2.
It must be made at proper time and place:- A is tenant of B. H offers him rent at a marriage
party. B is not bound to accept as tender is not made at a proper place.
3.
It must be of the whole obligation contracted for and not only of the part:- e.g. deciding of his
own to pay in the installments and offering the first installment was held invalid tender as it
was not of the whole amount due .
4.
If the tender related to the delivery of goods, it must give a reasonable opportunity to the
promise for inspection of goods so that he may be sure that the goods tendered are of contract
description.
5.
It must be made by a person who is in a position and is willing to perform the promise.
6.
It must be made to the proper person i.e. the promisee or his authorized person.
7.
If there are several joint promisees, an offer to any one of them is a valid tender (but the actual
payment must be made to all joint promisees, and not to any one of them.)
8.
In case of tender of money, exact amount should be tendered in the legal tender money.
Effect of refusal to accept a valid tender: The effect of refusal to accept a properly made “offer of
performance” is that the contract is deemed to have been performed by the promisor. And the promise
can be sued for breach of contract. Thus we can say that “a valid tender discharges the contract.”
2. Discharge by Mutual Consent or Agreement:
A contract is created by means of an agreement, it
may also be discharged by another agreement between the same parties.
A. Novation: “Novation occurs when a new contract is substituted for an existing contract, either
between the same parties or between different parties, the consideration mutually being the discharge
of the old contract.” If the parties are same, then small changes in the in the terms of contract is called
“alteration” and not “Novation”. For being “Novation”, the changes must be of significant nature.
Novation cannot be compulsory, it can only be with the mutual consent of all the parties.
B.
Alteration:-It means that change of one or more of the material terms of a contract. A material
alteration is one which alters the legal effect of the contract. e.g. change in the amount of money, change
in the rate of interest etc.
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Note that a material alteration made in a contract by one party without the consent of the other will
make the whole contract void and no person can maintain an action upon it.
C. Rescission. A contract may be discharged before the date of performance, by agreement between the
parties to the effect that it shall no longer bind them. Such an agreement amounts to “Rescission” or
cancellation of the contract, the consideration being the abandonment by the respective parties of their
rights under the contract. Example A promises to deliver some goods to B on say 14 th Nov. 2006. But
before the date of performance i.e. 14th Nov. 2006, A and B mutually agree that the contract will not be
performed. The contract stand discharged by rescission.
If there is non performance of a contract by both the parties for a long time without complaint, it
amounts to an implied rescission.
Note: In rescission, the existing contract is cancelled by mutual consent without substituting a new
contract in its place.
D. Remission. It is defined as “Acceptance of lesser amount than what was contracted for or a lesser
fulfillment of the promise made”
E. Waiver. It means deliberate giving up of a right which a party is entitled to under a contract
whereupon the other party to the contract is released form his obligation. Example A promises to stitch
a Shirt for B if B sings a song in A’s party and accepting it B sings a song in A’s party. Then later on B
says there is no need to stitch shirt for me, to which A gives his consent. Thus the contract is
terminated.
3. Discharge by Subsequent or Supervening Impossibility or Illegality.
Impossibility at the time of contract. If you contract for something impossible, the agreement is void
ab initio the promisor knows about the impossibility after using reasonable efforts, the promisor is
bound to compensate the promisee for any loss he may suffer because of non performance of the
promise, even if the agreement being void ab initio
Subsequent impossibility. Impossibility is found out after the contract is made, “ A contract to do an
act which, after making the contract, becomes impossible or unlawful, becomes void when the act
becomes impossible or unlawful.”
Conditions for It…
(i)
the act should have become impossible.
(ii)
The impossibility should be by reason of some event which the promisor could not prevent.
(iii)
the impossibility should not be self induced by the promisor or due to negligence.
To be impossible, it is sufficient that it becomes impracticable or extremely hazardous or useless from
the point of view of the object and purpose which the parties had in view,
If the performance of a contract becomes impossible by reason of supervening impossibility or illegality
of the act, it s logical to absolve the parties from further performance of it as they never did promise to
perform an impossibility.
4. DISCHARGE BY LAPSE OF TIME. In some circumstances, the laps of time may also discharge a
contacts, e.g. the period of limitation for simple contracts is three years the under limitation Act and
therefore on default by a debtor, if the creditor does not file a suit of recovery against him within three
years of default, the debt becomes time barred and the creditor will not get the help of the law. This in
effect discharges the contract. ‘Where times is of essence`, if the contract is not performed on time, the
contract comes to an end, and the party not at fault need not perform his obligation and may sue the
other party for damages.
5. DISCHARGE BY OPERATION OF LAW: - A contract is discharged by operation of law in the
following cases:(A) Death: Sometimes a contract is of a person nature and involves personal skills, of promiser, of
promisor, In such cases the contract is discharged on the death of the promisor. In such cases the
contract is discharged on the death of the promisor.
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(B) Insolvency: When a person is adjudged in solvent the he is released from his all liabilities in
current order of adjudication. His rights (Assets) and liabilities are transferred to the official assignee
or official receiver, on the case may be.
(C) Merger of rights: Sometimes, inferior right of a person under the some or other contract, in such a
case the inferior, right is vanished and is not required to be enforced, Foe example an ordinary debt can
be merged. In to rights, of ownership in such case the inferior right need not to be enforced because this
right have merge in to a superior right of mortgage or ownership.
(D) Loss of evidence of contract:There the evidence of the existence of the contract is lost or vanished. The contract is discharged for
example document of contract is lost or destroyed and not other evidence is available the contract is
discharged.
6.DISCHARGE BY BREACH OF CONTRACT:- A contract is sometimes discharged, by its breach
generally, Breach of contract means refused. Or future of any one party to perform his contractual
obligation under the contract specifically a breach of contract occurs when a party to a contract does
any of the other following things.
(1) Fails or refuses to perform his obligation under the contract.
(2) Disable himself from performing his past of the contract.
(3) Maker the performance of contract impossible by his own acts.
INDEMNITY AND GUARANTEE CONTROL
The contract of indemnity and guarantee are special kinds of contracts. These contract are therefore
also required to fulfill all the essential of a valid contract.
Indemnity Contract: Indemnity contract is a type of contingent contract. The term ‘Indemnity`
Simply means ‘Making Somebody Safe` or ‘Paying Somebody back`.
Section 124 of contract Act defines that ‘‘A contract by which one party. Promises to save the
other from loss caused to him by the conduct of the promise himself by the conduct of any other
person, is called a conduct of indemnity”.
The party who gives indemnity or who promises to compensate for or to make good the loss, is
called. Indemnifier and the party for whose protection or safety the indemnity is given or the party
whose loss is made good is called ‘Indemnified’ or ‘indemnity holder’.
Important features of an indemnity contract –
1. Two party.
2. Promises for pay compensation of loss/damage.
3. Loss/damage may be the own or other person.
4. Creation of liabilities.
5. It must be faith.
6. All essential features of valid contract.
7. Compensation for actual loss/damage.
8. It may be express or implied.
Loss/damage may be caused by some event, or accident, or some natural phenomenon or disaster.
Rights of Indemnified (Indemnity-Holder) –
1. Rights to claim for all damages/losses.
2. Rights to claim for all costs which is related to contract.
3. Rights to claim for all sums which his may have paid for contract.
Liabilities/Duties of Indemnified –
1. Liabilities to pay all damages/losses.
2. Liabilities to pay all costs related to contract.
3. Liabilities to pay all sum which is received by sell for contract from indemnified.
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Subject- Business Law
Guarantee Contract
The object of the contract of guarantee is to enable. A person to obtain an employment, or a loan, or
some goods or service on credit,
According to section 126 of the contract Act ‘‘A contract of guarantee is a contract to perform the
promise, or discharge the liability, of a third person in case of his default.”
The person who gives the guarantee is called the ‘Surety’ or ‘guarantor’ & the person in respect of
whose default the guarantee is given is called the principal debtor or he is the party on whose behalf.
Guarantee is given and the person to whom the guarantee is given is called the ‘Creditor’.
Essential features of a Guarantee Contract –
1. Three parties
2. Three agreement
3. Concurrence of the three parties
4. Control may be experts or implies
5. It may be oral or written
6. Liability of surety is secondary is dependent on principal debtor’s default.
7. Guarantee must be in the knowledge of debtor.
8. All essential of a valid contract.
9. Guarantee must not be obtained by means of misrepresentation.
10. Existence of a primary liability.
DISTINCTION BETWEEN A CONTRACT OF INDEMNITY AND GUARANTEE
S.No. Different Basis
Indemnity Contract
Guarantee Contract
1.
Nature of Contract Promises to save the One party promises to discharge the liability
other from loss.
of the third party in case of his default.
2.
No. of Parties
Only to parties are There are three parties.
there
3.
No. of contracts
There is only one There are three contract between debtors,
contract
creditors and surety.
4.
Nature of Liability
The liability of the The liability of the surely is secondary and
indemnifier
is dependent.
primary
and
independent.
5.
Arising of Liability Indemnifier’s liability Arises only after the default of debtor in
arises only on the payment.
happening
of
a
contingency.
6.
Existence of debt There is no existence There is always some existing debt or duty
or duty
debt or duty in this in this contract.
contract.
7.
Request by the It is not necessary for The surely generally gives guarantee to the
debtor
the indemnifier to act request of the debtor.
at
the
request
indemnified.
8.
Right to sue
The
indemnifier It surely has discharged. The debt after the
cannot sue the third default of the principal debtor, he becomes
party for loss in his entitled to sue the debtor in his own name.
own name.
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Kinds of Guarantee –
1. Specific or Simple Guarantee: When a guarantee is given in respect to a single debt or specific
transaction is to come to an end when the guarantee debt is paid or the promise is duly
performed. It is called a specific or simple guarantee.
2. Continuing guarantee: Section 129, of the contract Act defines a guarantee which towards to a
series of transaction, is called a continuing guarantee, thus, a continuing guarantee is not
confined to a single transaction but keeps on moving to several transaction continuously.
Revocation of Guarantee – Revocation of guarantee means cancellation of guarantee already
accrued, it may be noted that the specific guarantee cannot be revoked if the liability has already
secured. However a continuing guarantee can be revoked and on the revocation of such a guarantee.
The liability of the surely or guarantor comes to an end for the future transaction. The surety
continues to be liable for the transactions which have taken place up to the time of revocation. A
continuing guarantee may be revoked in any of the following waysA Guarantee may be revoked in any of the following ways1. By notice of revocation.
2. By death of surely.
3. By discharge of surely in various circumstances
A. By novation (Sec.62)
B. By variance in terms (Sec. 133)
C. By release/discharge of principal Debtor (Sec.-134)
D. When the creditor events in to an agreement with the principal debtors (Sec.13..)
E. By creditor act or omission impairing surety’s eventual remedy (Sec. 139)
F. By loss of security “(Sec. 141)
G. By invalidation of contract (Sec.142,143,144)
Nature and Extent of Surety’s Liability –
1. The liability of surety is co- extensive.
2. The liability of surety arises the same moment when default is made by the principal debtor.
3. The surety is free to restrict limit his liability.
4. Sometimes the surely is liable though the principal debtors is not liable.
5. If there is a condition precedent for the surety’s liability; the surety will be liable, only when
that condition is fulfilled first.
6. In a continuing guarantee liability of surety extends to a series of transaction over a period of
time.
7. The surely will not be liable if the creditor has obtained guarantee either by misrepresenting a
material fact regarding the transaction or by keeping silence to material circumstances.
8. A discharge of principal debtor by operation of law does not discharge the surely from liability.
Discharge of surety from liability –
The following are the modes or circumstances under which a surety is discharge from his liability –
1. By revocation
a)
Notice by surety
b)
Death of surety
c)
Notation.
2. By conduct of the creditor
a) Variance (change) in terms of the contract
b) Release or discharge or the principal debtor.
c) Certain arrangements made by the creditors with the principal debtors without the
consent of surety,
d) Creditors act or omission impairing surety’s eventual (ultimate) remedy.
e) Loss of security.
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3. By invalidation of conduct of guarantee
a) Guarantee obtained by misrepresentations
b) Guarantee obtained by concealment
c) Failure of co-surety to join a surety
RIGHT THE SURETY
I.Right against the Principal debtor
1. Right of subrogation
2. Right of indemnity
II. Right against the Creditor
1.Right to security
2. Right to claim set off
III. Right against the Co-Sureties
1. Equal contribution
2. Liability of co-securities bond in different sums
3. Right to share benefits of securities.
Bailment and pledge
Bailment
the world ‘bailment’ is derived from the French world the French world ‘baillier’ which means ‘to
deliver Etymologically, it means any kind of handling over’. In legal sense, it involves change of
possession of goods from one person to another for some specific purpose.
Definition of Bailment
Sec. 184 defines Bailment as the delivery of goods by one person to another for some purpose, upon a
contract, that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them. The person delivering the goods is called the
‘bailor’ and the person the person to whom they are delivered is called the ‘bailee’.
Examples
(a) A delivers a piece of cloth to B, a bailor, to be stitched into a suit. There is a contract or
bailment between A and B.
(b) A sells certain goods to B who leaves them in the possession of A . The relationship
between B and A is that of bailor and bailee.
Consideration in a contract of bailment
In a contract of bailment, the consideration is generally in the form money payment either by the bailor
or the bailee, as for example, when A gives his bicycle to B for repair, or when A gives his car to B on
hire. Such consideration in money form, however, is not necessary to support the promise on the part
of the bailee to return to goods. The detrainment suffered by the bailor, in parting with possession of
the goods, is a sufficient consideration to support the contract of bailment.
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Distinction between Bailment and Contract of sale
A contract of bailment differs from a contract of sale in the following respects:
S.
Basics of distinction
Bailment
Contract of sale
No.
1
Transfers of
There is only a transfer of possession
There is a transfer of
ownership/possession
of goods from the bailor to the bailee.
ownership of goods
from the seller to the
buyer.
2
Consideration not to be
The consideration need not be passed The consideration in
passed
between bailor and bailee.
terms of price must be
passed between seller
and buyer.
3
Return of goods
The bailee must return the goods to
There is no question of
the bailor on the fulfillment of the
such return of goods in
purpose for which the bailment is
contract of sale.
made.
Kids/types of Bailment
DUTIES OF A BAILOR
 Duty to disclose defects [Section 151]
 Duty to bear expenses [Section 158]
 Duty to indemnity the bailee in case of premature termination of gratuitous bailment [Section
159]
 Duty to indemnity the bailee against the defective title of bailor [Section 164]
 Duty to receive back the goods [Section 164
 Duty to bear the risk of loss [Section 152]
DUTIES OF A BAILEE
 Duty to take care of the goods bailed [Section 151&152]
 Duty not to make any anauthrosed use of goods [Section 154]
 Duty not to mix bailor‘s goods with his own goods [Section 155 to 157]
 Duty to return the goods [Section 160 & 161]
 Duty to return accretion to the goods [Section 163]
Rights of a Bailor
 Right to claim damage in case of negligence [Section152]
 Right to terminate the contract in case of unauthorized use [Section 153]
 Right to claim compensation in case of unauthorized use [Section 154]
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


Subject- Business Law
Right to claim the separation of goods in case of unauthorized mixture of goods which cannot be
separated [Section 157]
Right to demand return of goods [Section 160]
Right to claim compensation in case of unauthorized retention of goods [Section 161]
Right to demand accretions to goods[Section 163]
RIGHTS OF A BAILEE
 Right to claim damage [Section 150]
 Right to claim reimbursement of expenses [Section 158]
 Right to be indemnified in case of premature termination of gratuitous bailment [Section
159]
 Right to recover loss in case of bailor‘s defective title [Section 164]
 Right to recover loss in case of bailor‘s refusal to take the goods back [Section 164]
 Right to deliver goods to any one of the joint bailors [Section 165]
 Right to deliver goods to bailor in case of bailor‘s defective title [Section 166]
 Right to particulars lien [Section 170]
RIGHTS OF BAILOR AND BAILEE AGAINST WRONGDOERS
Rights of Bailor and Bailee against Wrongdoer [Section 180] If a third party wrongfully deprives
a bailee of the use or possession of the goods bailed, or does them any injury, the bailee is entitled to
such remedies as the owner might have used in the like case if no bailment had been made; and
either the bailor or the baiolee may bring a suit against a third person for such deprivation or injury.
Apportionment of Relief or Compensation Obtained by Such Suits [Section 181] Whatever is
obtained by way of relief or compensation in any such suit shall, as between the bailor and the bailee,
be dealt with according to their respective interests.
Example X delivered a TV to Y for repairs. Z forcefully takes possession of TV from Y‘s shop. In this
case, either X or Y may sue Z. If Y files the suit, he shall hand over the amount received after deducting
his repairs charges to X.
TERMINATION OF BAILMENT
I. Termination of every Contract of Bailment (whether Gratuitous or not)
Every contract of bailment comes to end under the following circumstances:
(a) On the Expiry of Fixed Period
(b) On fulfillment of the Purpose
(c) Inconsistent Use of Goods
(d) Destruction of the subject Matter of Bailment
II. Termination of Gratuitous Bailment
A contract of gratuitous bailment is terminated in the following circumstances also.
(a) Before the Expiry of fixed Period
(b) On Death of Bailor/Bailee
Meaning of Lien
Lien means the right of a person having possession of goods belonging to another to retain those
goods until the satisfaction of sum claimed by the person in possession of the goods. If may be noted
thet the possession of goods must be lawful and continuous. For example, X took Y’s godown on rent of
Rs.5,000 p.m on an agreement that X cat at any time deposit or take out his goods from the godown.
After six months, X stopped paying the rent. Y auctioned X’s goods and claimed lien. Y cannot claim lien
because it was agreed that X can take out his goods whenever he wanted.
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Type of Lien
(a)
Particular Lien [Section 170] A particular lien is right to retain only those goods in respect of
which some charges are due.
Example:- X gives a piece of cloth to Y, a tailor, to make a coat. Y promises X to deliver the coat as soon
as it is finished. Y is entitled to retain the coat till he is paid for (if he has not allowed any credit period)
but is not entitled to retain the coat (if he has allow one month’s credit for the payment.)
(b) General Lien [Section 171] A general lien is a right to retain all the goods as a security for the
general balance of account until the full satisfaction of the claims due whether in respect of those goods
or other goods. The general lien is available to other person only when there is an express contract to
that effect.
Example: - X deposited US 64 units and shares of Reliance Industries Ltd. as security with Citi Bank
and took a loan against the shares of Reliance Industries Ltd. Citi Bank may retain both the securities
until its claim are fully satisfied.
S. No.
1
Basic of distinction
Goods 9in respect of
which lien available
2
Purpose
3
To whom available in the
absence of contract to
contrary
4
Rendering of service
5
Purpose of delivery of
goods
Particular lien
It is available against those
goods in respect of which
some charges are due.
It is available only for nonpayment of remuneration for
the service.
It is available to every bailee
to whom the goods have been
bailed.
It is available only when some
service involving the exercise
of labour of skill has been
rendered.
The purpose of delivery of
goods is to confer an
additional value as the goods
bailed.
General lien
It is available against all
goods whether in respect of
which claims are due or not.
It is available for a general
balance of account.
It is available only to specific
bailees like bankers, factors,
Wharfingers, attorneys of
High Court policy brokers.
It is available even when no
such service has been
rendered.
The purpose of delivery of
goods is to deposit the goods
as security.
FINDER OF GOODS
Finder of goods is the person whom finds some goods which do not belong to him.
Example if X finds a purse or a diamond ring or a watch, which does not belong to him, he will be called
as a finder of goods.
Rights of a Finder of Goods
 Right to lien [Section 168]
 Right to sue for reward [Section 168]
 Right to sell [Section 169]
Duties of a Finder of Goods [Section 171]
Finder of goods is subject to the same responsibility as a bailee. The duties of a finder of goods are as
follows: Duty to take reasonable care
 Duty not use for personal purpose
 Duty not to mix with his own goods
 Duty to find the owner
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PLEDGE
Meaning of pledge (or pawn) [Section 172]
The bailment of goods as security for payment of a debt or performance of a premise is called pledge
(or pawn).
Example X borrows of Rs. 1,00,000 from Citi Bank and keeps his shares as security for payment of a
debt. It is a contract of pledge.
Meaning of A pawner (or pledgor) [Section 172)
The person who delivers the goods as security for payment of a debt or performance of promise is
called the pawnor or pledgor. In aforesaid example X is pawnor
Meaning of Pawnee (or pledge) [Section 172)
The person to whom the goods are delivered as security for payment of a debt or performance of
promise is called the Pawnee or Pledgee. In the aforesaid example. Citi Bank is the Pawnee.
Rights of Pawnee
 Right of retainer [Section 173]
 Right to claim reimbursement of extraordinary expenses [Section 173]
 Right to sue pawnor [Section 176]
 Right to sell [Section 176]
 Right against true owner [Section
Rights of a Pawnee
 Duty to take reasonable care of the goods pledged
 Duty not to make unauthorized use of goods
 Duty not to mix pawnor’s goods with his own goods
 Duty to return goods
 Duty to return accretion to the goods
Rights of Pawnor
 Right to get pawnee’s duties duly enforced
 Right to redeem [Section 177]
Duties of Pawnor
 Duty to comply with the terms of pledge
 Duty to compensate the Pawnee for extraordinary expenses [Section 185]
Distinction between Pledge and Bailment
Basic of distinction Pledge
1. Purpose
Pledge is bailment of goods for a specific
purpose i.e. repayment of a debt or
performance of a duty.
2. Right to use
Pawnee cannot use the goods pledged
3. Right to sell
Pawnee can sell the goods pledge after
giving notice to the pawnor in case of
default by the pawnor.
Bailment
Bailment is for a purpose of
any kind
Bailee can use the goods as per
terms of bailment
Bailment can either retain the
goods or sue the bailor for his
dues.
Distinction between pledges and Hypothecation
Hypothecation is also one of the modes of providing security. However, it is different from pledge in
the following respects:
Basic of distinction
Pledge
Hypothecation
1. possession of goods
Borrower transfer the possession
Borrower is not transfer the
of goods.
possession of goods.
2. Right to deal with the
Borrower has no right to deal with Borrower has a right to deal
goods.
the goods pledged.
with the hypothecated.
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Subject- Business Law
AGENCY
Meaning of Agency: Agency is relation between an agent his principal created by an agreement.
Section 182 of the Contract Act defines an Agent as ‘‘A person employed to do any act for
another, or to represent another in dealings with third persons. The person for whom such act is done,
or whom is so represented is called the principal”.
Essential Features of Agency
1. The principal
2. The agent
3. An agreement
4. Consideration not necessary
5. Representative capacity
6. Good faith
7. The competence of the principal
Modes or Methods or Creation of Agency
1. Agency by express agreement: A contract of agency may be made by express words, whether
written or oral.
2. Agency by implied agreement: ‘‘An authority is said to be implied when it is to be inferred
from the circumstances of the case.
(a) Agency by estoppels : When a principal by his conduct or act cause a third person to
believe that a certain person is his authorized agent the agency is aid to be an agency by
estoppels.
(b) Agency by necessity : It mean the agency which comes into existence when certain
circumstances compel a person to act as an agent for an other without his express
authority.
(c) Agency by holding out : When a principal by his active conduct or act and without any
objection permits another to act as his agent, the agency is the result of principal’s
conduct as to the agent.
3. Agency by ratification : Ratification means confirmation of an act which has already been
done. Sometimes, an act is done by a person on behalf of another person but without another
person’s knowledge and authority. If he accepts and confirm the act, he is said to have ratified
it.
4. Agency by operation of law : In certain circumstances the law treats a person as an agent of
another person. For example, (a) when a partnership is formed, every partner automatically
becomes agent o another partner. (b) when a company is formed its promoters are treated as
its agents by operation of law.
RIGHTS AND DUTIES OF AGENT
Rights of an Agent
1. Right to retain money received on principal’s account.
2. Right to receive remuneration.
3. Right of lien on principal’s property.
4. Right to be indemnified.
5. Right to compensation for injury caused by principal’s neglet.
Duties of an Agent
1. To follow the direction of the principal.
2. To conduct the business of agency with reasonable skill and diligence.
3. To render accounts on demand
4. To communicate with the principal.
5. Not to deal on his own account
6. To pay the amounts received for the principal
7. Not to delegate his authority
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8. Not to act in excess of authority
9. Duty on termination of agency by principal’s death or insanity.
10.
TERMINATION OF AGENCY
Termination of agency means revocation (cancellation) of authority of the agent the modes of
termination of agency may be classified are as :
(a) Termination of Agency by the act of the Parties.
1. By revocation o authority by the principal
2. By renunciation (giving up) of business of agency by the agency
3. By mutual agreement
(b) Termination of agency by Operation of Law
1. Completion of business of agency
2. Death or insanity of principal or agent
3. Insolvency of the principal
4. Destruction of subject matcer
5. Expiry of time
6. Agency subsequently becoming unlawful.
7.
Termination of sub agent’s authority
revocable agency
when the authority of agent cannot be revoked by the principal it is said to be an irrevocable
agency. An agency is irrevocable in the following cases :
1. If the agency is coupled with interest : when an agent himself has a special interest in the
property which forms the subject matter of the agency, such agency is said to be coupled with
interest.
2. Where the agent has partly exercised his authority
3. When the agent has incurred a personal liability.
DISTINCTION BETWEEN SUB-AGENT AND SUBSTITUTED AGENT
Basic of distinction
Sub-agent
Substituted Agent
1. Appointment
A sub-agent is appointed by the agent, i.e.
original agent.
2. Delegation of
Authority
Original agent delegates some of his
authority to the sub-agent
3. Control
A sub-agent acts under the control o the
agent.
4. Privity of contract
with principal
There is no privity of contract between
sub-agent and the principal. Therefore,
both of them cannot directly sue on each
other.
`agent is liable to the principal for the
acts of the sub-agent.
5. Liability of the agent
6. Accountability
7. Claim for
remuneration
8. Improper
appointment
The sub-agent may be held accountable
to the principal only for his wrongful acts
or fraud.
A sub-agent has no right to claim
remuneration from the principal.
A sub-agent may be improperly
appointed.
A substituted agent is named by
the agent and appointed by the
principal.
Original agent does not delegate
his authority to the substituted
agent.
A substituted agent acts under the
direction and control of the
principal.
There is a privity of contract
between substituted agent and
the principal. Therefore, both of
them can sue each other directly.
Agent is not responsible to the
principal for the acts of the
substituted agent.
A substituted agent is a
accountable to the principal for
each and every act.
A substituted agent can claim
remuneration from the principal.
A substituted can never be
improperly appointed.
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Subject- Business Law
UNIT-III
Limited Liability Partnership Act, 2008
(LLP Act)
Introduction
With the growth of Indian economy, the role played by its entrepreneurs as well as its technical and
professional manpower has been acknowledged internationally. In this background, a need was felt for
a new corporate form that would provide an alternative to the traditional partnership which exposes
its partners to unlimited personal liability and a statute based governance structure of limited liability
companies.
Need –
At present, under partnership law, the maximum numbers of partners a partnership firm can have is
twenty also the partners are liable jointly and severally and most importantly their liability is unlimited
which means that the personal property of the partners can also be attached for the satisfaction of the
debts, in addition to the capital contributed by the partners in the firm.
This is the principal reason why partnerships firms of professionals have not grown in size to meet the
challenges posed today. Not only are the firm’s assets completely liquidated under the standard
principles of the partnership law, but the partners are also jointly and severally liable for the entire
liabilities of the partnership. Thus, the present system acts as a deterrent for the growth and expansion
of service based organizations.
Object of Limited Liability Partnership Act, 2008 [LLP] –
Limited Liability Partnership [LLP] is viewed as an alternative corporate business vehicle that provides
the benefits of the limited liability but allows its members the flexibility of organizing their internal
structure as a partnership based on a mutually arrived agreement. LLP form is expected to enable
entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and
technical disciplines, to form commercially efficient vehicles suited to their requirements.
With this background, Limited Liability Partnership Act, 2008 [LLP Act] was enacted on January 7,
2009. Subsequently, Government of India [GOI] notified various provisions of LLP Act on 31st March
2009. GOI has, on April 1, 2009, also notified the Limited Liability Partnership Rules, 2009 [LLP Rules]
in respect of registration and operational aspects under the LLP Act.
The salient features of the Limited Liability Partnership Act, 2008, are as follows:(i) Body corporate- The LLP shall be a body corporate and a legal entity separate from its partners.
(ii) Mutual rights and duties of partners- The mutual rights and duties of the partners of the
LLP inter se and those of the LLP and its partners shall be governed by an agreement between the
partners inter se or between the LLP and the partners subject to the provisions of the Act. The Act
provides flexibility to devise the agreement as per their choice. In the absence of any such agreement,
the mutual rights and duties shall be governed by the provisions of the Act.
(iii) Separate legal existence- The LLP will be a separate legal entity, liable to the full extent of its
assets, with the liability of the partners being limited to their agreed contribution in the LLP. No
partner would be liable on account of the independent or unauthorised actions of other partners or
their misconduct. The liabilities of the LLP and its partners who are found to have acted with intent to
defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other
liabilities of the LLP.
(iv) Minimum partners- Every LLP shall have at least two partners and shall also have at least two
individuals as Designated Partners, of whom at least one shall be resident in India.
(v) Accounts- The LLP shall be under an obligation to maintain annual accounts reflecting true and fair
view of its state of affairs. A statement of accounts and solvency shall be filed by every LLP with the
Registrar every year. The accounts of LLPs shall also be audited, subject to any class of LLPs being
exempted from this requirement by the Central Government.
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(vi) Limited Liability- The liability of a partner of a LLP is limited up to his agreed contribution to the
LLP.
(vii) Perpetual succession- A LLP is a legal entity with perpetual succession.
(viii) Conversion- A firm, private company or an unlisted public company would be allowed to be
converted into a LLP in accordance with the provisions of the act.
(ix)Winding up- The winding up of the LLP may be either voluntary or by the Tribunal to be
established under the Companies Act, 1956. Till the Tribunal is established, the power in this regard
has been given to the High Court.
(x) Non-applicability of the Indian Partnership Act, 1932- The Indian Partnership Act, 1932 shall
not be applicable to LLPs.
KEY DEFINITIONS:"Body Corporate" is defined to mean a company as defined under the Companies Act, 1956 and
includes LLP, LLP incorporated outside India, a foreign company but does not include a corporation
sole, a registered co-operative society and any other body corporate notified by the Central
Government (not being a company defined under the Companies Act, 1956 or LLP defined under LLP
Act). [Section 2(1)(d)]
"Business" includes every trade, profession, service and occupation. [Section 2(1)(e)]
"Financial Year", in relation to LLP, means the period from 1st April of a year to the 31st March of the
following year. However, in case of LLP incorporated after 30th September, financial year may end on
31st March of the year next following that year. [Section 2(1)(l)]
"Foreign Limited Liability Partnership" means a LLP formed, incorporated or registered outside
India which establishes a place of business within India. [Section 2(1)(m)]
"Limited Liability Partnership" means a partnership formed and registered under LLP Act. [Section
2(1)(n)]
"Limited liability partnership” agreement" means any written agreement between the partners of
LLP or between the LLP and its partners which determines the mutual rights and duties of the partners
and their rights and duties in relation to that LLP. [Section 2(1)(o)]
"Partner" in relation to LLP means a person who becomes a partner in a LLP in accordance with the
LLP agreement. [Section 2(1)(q)]
DESIGNATED PARTNERS [SECTION 7]
LLP shall have at least two "designated partners" who are individuals and at least one of them shall be
"resident in India". In case one or more of the partners of a LLP are bodies corporate, at least two
individuals who are partners of such LLP or nominees of such bodies corporate shall act as "designated
partners"
— "Resident in India" means a person who has stayed in India for minimum 182 days during the
immediately preceding 1 year.
Designated partner is responsible for compliance with the provisions of LLP Act.
Designated Partner is required to obtain Designated Partner Identification Number [DPIN] from the
Central Government.
Application for allotment of DPIN needs to be submitted online on the LLP website along with the
necessary proof duly attested and certified as prescribed.
INCORPORATION OF LLP [SECTIONS 11 TO 21]
Procedure for incorporation of LLP is similar to the procedure for incorporation of a company under
the Companies Act, 1956. Applicants are first required to file the application for reservation of name
with the Registrar of Companies [ROC]. Once the name applied is approved by the ROC, the documents
for incorporation of LLP need to be filed.
Name of every LLP shall end with the words "Limited Liability Partnership" or "LLP".
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Name which is undesirable or nearly resembles to that of any other partnership firm or LLP or anybody
corporate or trade mark, is not allowed.
Any entity (body corporate/registered partnership firm) which has a name similar to the name of LLP
which has been incorporated subsequently may seek change of name of such LLP through ROC within
24 months from date of registration of such LLP.
No person shall carry on business under any name/title which contains the words "Limited Liability
Partnership" or "LLP" without duly incorporating it as LLP under the LLP Act.
LLP is required to file with the ROC, the LLP agreement ratified by all the partners within 30 days of
incorporation of LLP.
PARTNERS AND THEIR RELATIONS AND EXTENT OF LIABILITY
[SEC 22 TO 31]
Mutual rights and duties of partners of a LLP inter se and those of the LLP and its partners shall be
governed by an agreement between the partners, or agreement between the LLP and its partners. In
absence of any such agreements, the mutual rights and duties shall be governed by the LLP Act.
Every partner of a LLP is, for the purpose of the business of LLP, the agent of LLP, but not of other
partners.
LLP, being a separate legal entity, shall be liable to the full extent of its assets whereas the liability of
the partners of LLP shall be limited to their agreed contribution in the LLP.
LLP is not bound by anything done by a partner in dealing with a person if –
— the partner in fact has no authority to act for the LLP in doing a particular act; and
— the person knows that he has no authority or does not know or believe him to be a partner of the
LLP
LLP is liable if the partner of a LLP is liable to any person for wrongful act/omission on his part in the
course of business of LLP/with its authority
Obligation of LLP whether arising in contract or otherwise, shall solely be the obligation of LLP.
Liabilities of LLP shall be met out of properties of LLP.
Partner is not personally liable for the obligations of LLP solely by reason of being a partner of LLP.
No partner is liable for the wrongful act or omission of any other partner of LLP, but the partner will be
personally liable for his own wrongful act or omission.
The liability of the LLP and partners who are found to have acted with intent to defraud creditors or for
any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP.
Cessation of a partner on grounds like resignation, death, dissolution of LLP, declaration that a person
is of unsound mind, declared/applied to be adjudged as insolvent etc. will not be effective unless —
—
The person has notice that the partner has ceased to be so; or
—
Notice of cessation has been delivered to ROC.
The notice of cessation may be filed by the outgoing partner if he has reasonable cause to believe that
LLP has not filed the said notice.
CONTRIBUTION BY PARTNER [SECTIONS 32 AND 33]
A contribution of a partner to the capital of LLP may consist of any of the –
— tangible, movable or immovable property
— intangible property
— Other benefit to the LLP including money, promissory notes, contracts for services performed or to
be performed.
The obligation of a partner for the contribution shall be as per the LLP agreement.
Creditor, which extends credit or acts in reliance on an obligation described in the LLP agreement,
without the notice of any compromise made between the partners, may enforce the original obligation
against such partner.
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AUDIT/FINANCIAL DISCLOSURES [SECTIONS 34 AND 35]
LLP shall maintain the prescribed books of accounts relating to its affairs on cash or accrual basis and
according to the double entry system of accounting.
The accounts of every LLP are required to be audited, except in following situations:
— When turnover does not exceed Rs. 40,00,000/- in any financial year; or
— Where contribution does not exceed Rs. 25,00,000/Central Government has powers to exempt certain class of LLP from requirement of compulsory audit.
LLP are required to file following documents with the ROC –
— Statement of Account and Solvency, within 30 days from the end of 6 months of the financial year;
— Annual return within 60 days from the end of the financial year.
ASSIGNMENT & TRANSFER OF PARTNERSHIP RIGHTS [SEC.42]
The rights of a partner to a share of the profits and losses of the LLP and to receive distribution in
accordance with the LLP agreement are transferable, either wholly or in part. However, such transfer of
rights does not cause either disassociation of the partner or a dissolution and winding up of the LLP.
Such transfer of right, shall not, by itself entitle, the assignee or the transferee to participate in the
management or conduct of the activities of the LLP or access information concerning the transactions
of the LLP.
FOREIGN LLP [SECTION 59 AND RULE 34]
On establishment of a place of business in India, foreign LLP are required to file prescribed documents
for registration with ROC within 30 days of the establishment in India.
Any alteration in the constitution documents, overseas principle office address and partner of foreign
LLP are required to be filed with the ROC in the prescribed form within 60 days of the close of the
financial year.
Any alteration in the certificate of registration of foreign LLP, authorized representative in India and
principle place of business in India are required to be filed with the ROC in the prescribed form within
30 days of alteration.
Foreign LLP ceasing to have a place of business in India, are required to give notice to ROC in the
prescribed form within 30 days of its intention to close the place of business and from the date of such
notice, the obligation of Foreign LLP to file any document with the ROC shall cease, provided it has no
other place of business in India and it has filed all the documents due for filing as on the date of the
notice.
CONVERSION OF PARTNERSHIP FIRM/PRIVATE COMPANY/UNLISTED PUBLIC COMPANY INTO
LLP [SECTIONS 55 TO 58, SECOND, THIRD AND FOURTH SCHEDULES]
GOI has, on May 22, 2009, notified provisions relating to conversion of –
• a partnership firm as defined under the Indian Partnership Act,1932 into LLP;
• a private limited company into LLP;
• an unlisted public company into LLP.
Second, Third and Fourth Schedules to the LLP Act contain provisions relating to conversion of a
partnership firm into LLP, a private limited company into LLP and unlisted public company into LLP,
respectively.
Eligibility for conversion:
— Firm into LLP : Firm can be converted into LLP if all the partners of firm become the partners of LLP
and no one else.
— Company into LLP : Private limited company/unlisted public company can be converted if and only if
(a) there is no security interest in its assets subsisting or in force at the time of application for
conversion; and
(b) all the shareholders of the company become partners of LLP and no one else.
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• For conversion of firm/private limited company/unlisted public company into LLP, the partners of
the firm/shareholders of company are required to file a statement and incorporation documents in the
prescribed form with the ROC.
• On receiving the documents for conversion, ROC shall register the documents and issue certificate of
registration specifying the date of registration as LLP. Upon registration by ROC, LLP shall intimate
Registrar of Firm [ROF]/ROC, as the case may be, about conversion within 15 days of registration.
• On and from the date specified in the certificate of registration issued by ROC — all tangible (movable/immovable) & intangible property, liabilities, interest, obligation etc. relating
to the firm/private limited company/unlisted public company and the whole of the undertaking of the
firm/private limited company/unlisted public company, shall be transferred to and shall vest in the LLP
without further assurance, act or deed.
— firm/private limited company/unlisted public company shall be deemed to be dissolved and
removed from the records of ROF/ROC, as the case may be.
• If any property/rights, etc. of the partnership firm/private limited company/unlisted public company
is registered with any authority, LLP shall take steps to notify the authority of the conversion.
• Upon conversion, following things/events in favour of or against the firm/private limited
company/unlisted public company on the date of registration may be continued, completed and
enforced by or against the LLP:
— all proceedings, conviction, ruling, order or judgment of any Court, Tribunal or other authority
pending in any Court or Tribunal or before any authority on the date of registration
— every agreement irrespective of whether or not the rights and liabilities there under could be
assigned,
— deeds, contracts, schemes, bonds, agreements, applications, instruments and arrangements
— every contract of employment
— appointment in any role or capacity
— any approval, permit or license issued under any other Act, etc.
• In case of a firm, every partner of a firm which is converted into a LLP shall continue to be personally
liable (jointly and severally with LLP) for the liabilities and obligations of the firm incurred prior to the
conversion or which arose from any contract entered into prior to the conversion. In case any such
partner discharges any such liability or obligation he shall be entitled (subject to any agreement with
the LLP to the contrary) to be fully indemnified by LLP in respect of such liability or obligation.
• For a period of 12 months commencing on or before 14 days from the date of registration, LLP shall
ensure that every official correspondence of LLP bears the following:
— a statement that it was, as from the date of registration, converted from a firm/private limited
company/unlisted public company into a LLP; and
— the name and registration number, if applicable, of the firm/a private limited company/an unlisted
public company from which it was converted.
GENERAL PARTNERSHIP
Liability of partners unlimited.
Partners jointly and severally liable.
Partnership firms are neither body corporate nor do
they have perpetual succession and legal entity.
Registration of partnership is not mandatory.
Partnership cannot have more than 20 partners.
LLP
Liability of partners limited to contribution.
Partners not liable for act of other partners.
LLP is a body corporate having perpetual
succession and legal entity.
Incorporation of LLP is mandatory.
LLP can have more than 20 partners.
COMPANY
LLP
Incorporation procedure comparatively complex Incorporation procedure relatively simple and
than LLP.
expeditious.
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B.Com 1st Sem.
Management structure usually complex –
shareholders do not ordinarily participate in day to
day management.
Capital structure relatively less flexible than LLP.
Elaborate provision relating to redressal in case of
oppression and mismanagement.
Complex statutory compliance requirements.
Subject- Business Law
Flexible management structure – Partners are
entitled to participate in management.
Flexible capital structure.
No provision relating to redressal in case of
oppression and mismanagement.
Limited statutory compliances as compared to
Companies.
COMPROMISE, ARRANGEMENT OR RECONSTRUCTION OF LLPS
[SECTION 60]
Provisions have been made in the LLP Act for allowing a compromise and arrangement including
mergers and amalgamations.
Compromise and arrangement can be between LLP and its creditors or between LLP and its partners.
If majority representing 3/4th in value of creditors or partners, at the meeting, agree to compromise or
arrangement shall, if sanctioned by National Company Law Tribunal [NCLT] be binding on all the
creditors, all the partners and LLP. NCLT to pass order subject to disclosure of all material facts/latest
financial position and pendency of investigation proceedings.
NCLT order shall be filed with the ROC within 30 days, in order to be effective.
In case of scheme of the amalgamation, NCLT shall pass order only on receipt of report from the ROC
that the affairs of the LLP (transferor LLP) have not been conducted in the manner prejudicial to the
interest of the partner/public.
WINDING-UP OF LLP [SECTIONS 63 AND 64]
LLPs may be wound-up either voluntarily or by NCLT. LLP may be wound up by NCLT if –
• LLP decides to wound up by NCLT;
• Number of partners is reduced below 2 for a period of more than 6 months;
• LLP is unable to pay its debts;
• LLP has acted against the interests of the sovereignty and integrity of India, the security of the State or
public order;
• LLP has defaulted in filing Statement of Account and Solvency or annual return with the ROC for 5
consecutive financial years; or
• NCLT is of the opinion that it is just and equitable that the LLP be wound up.
In January 2010, MCA had notified that certain provisions relating to winding-up of a company under
the Companies Act, 1956 will also be applicable to a LLP. The notification also provides details of
modification in the provisions of the Companies Act relating to winding up for its applicability to
winding up of LLP under the LLP Act. Subsequently, on 30 March 2010, issued Limited Liability
Partnership (Winding up and Dissolution) Rules, 2010.
MISCELLANEOUS PROVISIONS
The Central government has been empowered to apply any of the provisions of the Companies Act,
1956 to LLPs with suitable changes or modification. [Section 67]
ROC may strike off the name of LLP from the register of LLP if LLP is not carrying on business or its
operation, in accordance with the provisions of LLP Act in the manner prescribed. [Section 75]
Forms/documents required to be filed under the LLP shall be filed in electronic form online on the LLP
portal duly authenticated by the partner/designated partner with a digital signature and further
attested by the practicing chartered accountant/company secretary/cost accountant whenever
required. [Section 68]
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Presently all the provisions of the LLP Act, other than those relating to winding-up and dissolution of
LLP and appellate provisions to be exercised by NCLT and National Company Law Appellate Tribunal
[NCLAT], have been brought into force.
Till the constitution of NCLT and NCLAT under the Companies Act, 1956, the powers of NCLT and
NCLAT will be exercised by the Company Law Board or High Court as is specified in the LLP Act.
[Section 81]
Unless specifically provided, the provisions of the Indian Partnership Act, 1932 are not applicable to
LLPs. [Section 4]
Merits of LLP
1) Renowned and accepted form of business worldwide in comparison to Company.
2) Easy to form or easy to establish and low cost of formation.
3) Body Corporate (Separate Legal Entity)
4) Limited Liability
5) Perpetual Succession
6) Flexible to manage i.e. easy to manage and run.
7) Easy transferable ownership
8) Capacity to sue
9) Lesser compliances
10) No requirement of any minimum capital contribution.
11) No restrictions as to maximum number of partners.
12) LLP & its partners are distinct from each other.
13) Partners are not liable for Act of partners.
14) Less Compliance level.
15) No exposure to personal assets of the partners except in case of fraud.
16) Less requirement as to maintenance of statutory records.
17) Less Government Intervention.
18) Easy to dissolve or wind-up.
19) Professionals can form Multi-disciplinary Professional LLP, which was not allowed earlier.
20) Audit requirement only in case of contributions exceeding Rs. 25 lakh or turnover exceeding Rs.
40 lakh.
Demerits of LLP
1) Any act of the partner without the other partner, may bind the LLP
2) Under some cases, liability may extend to personal assets of partners.
3) Cannot raise money from Public.
Conclusion
The LLP will act as an engine of growth for economic development of the country and would lead to the
growth of professional services in the country. With the liberalisation and globalisation of Indian
economy, the LLP, as an alternate mode of carrying business, will encourage joint ventures and would
make Indian service sectors globally competitive. LLP structure will enable Small & Medium
Enterprises and family partnerships to expand as they will be able to admit outsiders with capital or
skill as partners. The hybrid structure of LLP will facilitate entrepreneurs, service providers and
professionals to organize and operate in an innovative and efficient manner for effectively competing in
the global market.
Negotiable Instruments Act, 1881
The Negotiable Instruments Act was enacted, in India, in 1881 and it came into force on 1st March,
1881. Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in
India, and the present Act is also based on the English Act with certain modifications. It extends to the
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whole of India except the State of Jammu and Kashmir. The Act operates subject to the provisions of
Sections 31 and 32 of the Reserve Bank of India Act, 1934
Definition
A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order
or to bearer.
Explanation (i) - A promissory note, bill of exchange or cheque is payable to order which is expressed
to be so payable or which is expressed to be payable to a particular person, and does not contain words
prohibiting transfer or indicating an intention that it shall not be transferable.
Explanation (ii) - A promissory note, bill of exchange or cheque is payable to bearer which is
expressed to be so payable or on which the only or last endorsement is an indorsement in blank.
Explanation (iii) - Where a promissory note, bill of exchange or cheque, either originally or by
endorsement, is expressed to be payable to the order of a specified person, and not to him or his order,
it is nevertheless payable to him or his order at his option.
(2) A negotiable instrument may be made payable to two or more payees jointly, or it may be made
payable in the alternative to one of two, or one or some of several payees. The word negotiable means
‘transferable by delivery,’ and the word instrument means ‘a written document by which a right is
created in favour of some person.’ Thus, the term “negotiable instrument” literally means ‘a written
document which creates a right in favour of somebody and is freely transferable by delivery.’
A negotiable instrument is a piece of paper which entitles a person to a certain sum of money
and which is transferable from one to another person by a delivery or by endorsement and delivery.
“According to Blackburn J, a negotiable instrument has two characteristics namely
1. It is transferable, like cash, by delivery (which assumes it is in a deliverable state) so that the
transferee can enforce the rights embodied in it in his own name.
2. The transferee being a bonafide holder for value can acquire a better title to it than that of his
transferor.”
Negotiable Instrument is moreover a document of title which clearly explains the rights towards the
payment of money or a security for money which is transferable by delivery either by custom or by
legislation. The use of negotiable Instrument is mainly to facilitate payment for exports and imports of
trade. The rapid growth of technology has revolutionized the world with computer, which is used in
every field of profession. This has reduced the use of negotiable instrument and in future it may decline
more. Even though the electronic revolution has got more advantages it may be considered as the next
step because the world needs time to get used to it. But, the negotiable instrument are still in use.
Characteristics of Negotiable Instruments
1. Free transferability or easy negotiability
Negotiable instrument is freely transferable from one person to another without any formality. The
property (right of ownership) in these instruments passes by either endorsement and delivery (in case
it is payable to order) or by delivery merely (in case it is payable to bearer) and no further evidence of
transfer is needed.
2. Title of holder is free from all defects
A person who takes negotiable instrument bona-fide and for value gets the instrument free from all
defects in the title. The holder in due course is not affected by defective title of the transferor or of any
other party.
3. Transferee can sue in his own name without giving notice to the debtor:
A bill, promissory note or a cheque represents a debt, i.e., an “actionable claim” and implies the right of
the creditor to recover something from the debtor.
The creditor can either recover this amount himself or can transfer his right to another person.
In case he transfers his right, the transferee of a negotiable instrument is entitled to sue on the
instrument in his own name in case of dishonour, without giving notice to the debtor of the fact that he
has become holder.
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In case of transfer or assignment of an ordinary “actionable claim” i.e., a book debt evidenced by an
entry by the creditor in his account book, under the transfer of property act, notice to the debtor is
necessary in order to make the transferee entitled to sue in his own name.
4. Presumptions:
Certain presumptions apply to negotiable instruments. Section 118, 119 and 139 lay down the
following presumptions:
(a) For consideration : that every negotiable instrument, was made, drawn, accepted, endorsed or
transferred for consideration.
(b) As to date : that every negotiable instrument bearing a date was made or drawn on such date.
(c) As to time of acceptance : that every bill of exchange was accepted within a reasonable time after
its date and before its maturity.
(d) As to transfer: that every transfer of a negotiable instrument was made before its maturity
(e) As to time of endorsements : that the endorsements appearing upon a negotiable instrument
were made in the order in which they appear thereon.
(f) As to stamps : that a lost promissory-note, bill of exchange or cheque was duly stamped.
(g) As to a holder in due course: that every holder of a negotiable instrument is holder in due course
(this presumption would not arise where it is proved that the holder has obtained the instrument from
its lawful owner, or from any person in lawful custody thereof, by means of an offence, fraud or for
unlawful consideration and in such a case the holder has to prove that he is a holder in due course
(h) As to dishonour: that the instrument was dishonoured, in case a suit upon a dishonoured
instrument is filed with the court and the fact of protest is proved.
Section 139 - Presumption in favour of holder:
It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of
the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.
“The effect of these presumptions is to place the evidential burden on the accused of proving that the
cheque was not received by the complainant towards the discharge of any liability. Because both
sections 138 and 139 require that the court shall presume the liability of the drawer of the cheques for
the amounts for which the cheques are drawn…it is obligatory on the courts to raise this presumption
in every case where the factual basis for the raising of this presumption had been established. It
introduced an exception to the general rule as to the burden of proof in criminal cases and shifts the
onus on to the accused.”
Types of Negotiable Instruments
There are two types of Negotiable instruments:Negotiable Instruments recognized by statutes: The Negotiable Instruments Act mentions only three
kinds of negotiable instruments (Section 13).
These are: 1. Promissory Notes
2. Bills of Exchange, and
3. Cheques
Negotiable instruments recognized by usage or customs of trade: There are certain other instruments
which have acquired the characteristic of negotiability by the usage or custom of trade.
For example: Exchequer bills, Bank notes, Share warrants, Circular notes, Bearer debentures, Dividend
warrants, Share certificates with blank transfer deeds, etc.
Promissory Note
Definition:
According to Section 4 of Negotiable Instruments Act, “A promissory note is an
instrument in writing (not being a bank-note or a currency-note) containing an unconditional
undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain
person, or to the bearer of the instrument.”
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Parties to a Promissory Note
There are primarily two parties involved in a promissory note. They are:
(i) The Maker or Drawer: The person who makes the note and promises to pay the amount stated
therein.
(ii) The Payee – The person to whom the amount is payable i.e. to whom the payment is to be made is
called a payee.
In course of transfer of a promissory note by payee and others, the parties involved may be –
(a) The Endorser – the person who endorses the note in favour of another person.
(b) The Endorsee – the person in whose favour the note is negotiated by endorsement.
Characteristics of Promissory Note
1. It must be in writing:
A promissory note has to be in writing
An oral promise to pay does not become a promissory note
The writing may be on any paper or book
Illustrations: A signs the instruments in the following terms:
“I promise to pay B or order Rs.500/-”
“I acknowledge myself to be indebted to B in Rs.1,000/- to be paid on demand, for value received”
Both the above instruments are valid promissory notes.
2. It must contain a promise or undertaking to pay:
There must be a promise or an undertaking to pay
The undertaking to pay may be gathered either from express words or by necessary implication.
A mere acknowledgement of indebtedness is not a promissory note, although it is valid as an agreement
and may be sued upon as such
Illustrations: A signs the instruments in the following terms:
“Mr. B I owe you Rs.1,000”
“I am liable to pay to B Rs.500”
The above instruments are not promissory notes as there is no undertaking or promise to pay.
There is only an acknowledgement of indebtedness.
Where A signs the instrument in the following terms:
“I acknowledge myself to be indebted to B in Rs.1,000, to be paid on demand, for value received,” there
is a valid promissory note
3. The promise to pay must be unconditional:
A promissory note must contain an unconditional promise to pay
The promise to pay must not depend upon the happening of some uncertain event, i.e., a contingency or
the fulfillment of a condition
Illustrations: A signs the instruments in the following terms:
“I promise to pay B Rs. 500 seven days after my marriage with C”
“I promise to pay B Rs. 500 as soon as I can”
The above instruments are not valid promissory notes as the payment is made depending upon the
happening of an uncertain event which may never happen and as a result the sum may never become
payable
4. It must be signed by the maker:
It is imperative that the promissory note should be duly
authenticated by the ‘signature’ of the maker
‘Signature’ means the writing or otherwise affixing a person’s name or a mark to represent his name, by
himself or by his authority with the intention of authenticating a document.
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5. The maker must be a certain person:
The instrument must itself indicate with certainty who is the person or are the persons engaging
himself or themselves to pay
Alternative promisors are not permitted in law because of the general rule that “where liability lies no
ambiguity must lie”
6. The payee must be certain:
Like the maker the payee of a pronote must also be certain on the face of the instrument
A note in favour of fictitious person is illegal and void
A pronote made payable to the maker himself is a nullity, the reason being the same person is both the
promisor and the promisee
7. The undertaking must be to pay a certain and definite sum of money only.
For a valid pronote it is also essential that the sum of money promised to be payable must be certain
and definite
The amount payable must not be capable of contingent additions or subtractions
Illustrations: A signs the instruments in the following terms:
“I promise to pay B Rs.500 and all other sums which shall be due to him”
“I promise to pay B Rs.500, first deducting thereout any money which he may owe me”
The above instruments are invalid as promissory notes because the exact amount to be paid by A is not
certain
8. The amount payable must be in legal tender money of India:
A document containing a promise to pay a certain amount of foreign money or to deliver a certain
quantity of goods is not a pronote. The payment must be in a legal money of the country.
9. Revenue stamps or requisite value under the stamp Act of the country should be affixed.
10. Other matters of form like number, date, place etc, are usually found given in notes, but they
are not essentials in law.
11. A bank note or a currency note is not a promissory note within the meaning of this section.
12. A promissory note cannot be made payable to bearer on demand.
Bill of Exchange
Definition: Section 5 of the Negotiable Instruments Act defines a Bill of Exchange as follows:
“A bill of exchange is an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the
order of, a certain person or to the bearer of the instrument.” It is also called a Draft.
Illustration:
Mr. X purchases goods from Mr. Y for Rs.1000/Mr. Y buys goods from Mr. S for Rs.1000/Then Mr. Y may order Mr. X to pay Rs.1000/- Mr. S which will be nothing but a bill of exchange.
Parties to a Bill of Exchange
There are three parties involved in a bill of exchange
(i) The Drawer – The person who makes the order for making payment.
(ii) The Drawee – The person to whom the order to pay is made. He is generally a debtor of the
drawer. The person directed to pay the money by the drawer is called the drawee.
(iii) The Payee – The person to whom the payment is to be made. The person named in the instrument,
to whom or to whose order the money are directed to be paid by the instruments are called the payee.
The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the words
in the bill would be Pay to us or order.
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In a bill where a time period is mentioned, is called a Time Bill.
But a bill may be made payable on demand also. This is called a Demand Bill.
Essentials of a Bill of Exchange
1. It must be in writing
2. It must contain an order to pay. A mere request to pay on account, will not amount to an
order
3. The order to pay must be unconditional
4. It must be signed by the drawer
The drawer, drawee and payee must be certain. A bill cannot be drawn on two or more
drawees but may be made payable in the alternative to one of two or more payees
5. The sum payable must be certain
6. The bill must contain an order to pay money only
7. It must comply with the formalities as regards date, consideration, stamps, etc
Cheque
Definition: A cheque is bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in
the electronic form. (Sec. 6, NIA)
Explanation I - For the purposes of this section, the expressions(a) a cheque in the electronic form means a cheque which contains the exact mirror image of a paper
cheque, and is generated, written and signed in a secure system ensuring the minimum safety
standards with the use of digital signature (with or without biometrics signature) and asymmetric
crypto system;
(b) a truncated cheque means a cheque which is truncated during the course of a clearing cycle, either
by the clearing house or by the bank whether paying or receiving payment, immediately on generation
of an electronic image for transmission, substituting the further physical movement of the cheque in
writing.
Explanation II - For the purposes of this section, the expression clearing house means the clearing
house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve
Bank of India.
A cheque is a kind of bill of exchange but it has additional qualification namely1. It is always drawn on a specified banker and
2. It is always payable on demand without any days of grace.
Parties to a cheque
Drawer: Drawer is the person who draws or makes the cheque.
Drawee: Drawee is the drawer’s banker on whom the cheque has been drawn.
Payee: Payee is the person who is entitled to receive the payment of a cheque.
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B.Com 1st Sem.
Subject- Business Law
Crossing of Cheques
A Crossed Cheque is one which bears across its face two parallel transverse lines with or without
certain words. Such lines are usually drawn on the left side top corner of the face of the Cheque.
However, such lines can be drawn anywhere on the face of the Cheque.
Crossing of Cheque is a direction to the drawee bank to pay the amount of the Cheque to a bank or to a
particular bank. Therefore, a crossed Cheque is not payable to the payee or holder at the counter of the
bank. In order to get the payment of the Cheque, it is required to be deposited in an account with a
bank. The bank, in turn, presents the Cheque to the drawee bank and gets payment on behalf of the
payee or indorsee of the Cheque.
The objects of crossing of a Cheque are as follows:
To direct the drawee bank to pay the amount of the Cheque only to a bank or a particular bank;
To prevent the payment of the Cheque to an unauthorized or wrong person.
KINDS OF CROSSING
Crossing of Cheque is basically of two kinds:1. General crossing, and
2. Special crossing.
These basic kinds of crossing may take several forms. Some of them are:
3. Restrictive crossing.
4. Not negotiable crossing.
1. General crossing: A Cheque is deemed to be generally crossed in any of the following cases:
a. When it bears across its face two parallel transverse lines without any words.
b. When it bears across its face an addition of the words “and company” or any abbreviation
thereof between two parallel transverse lines. It may also be with or without the words ‘Not
negotiable’.
Effects of general crossing
The Cheque is not payable at the counter of the bank.
The drawee bank shall pay the amount of the Cheque only to a banker. Therefore, the holder will have
to deposit the Cheque in an account with any banker. [Sec. 126 Para 1]
2. Special crossing: A Cheque is said to be specially crossed when the name of a banker is added across
the face of the Cheque, either with or without words, not negotiable. Usually, two parallel transverse
lines are used in special crossing but they are required not by law.
Effects of special crossing:
In the case of a Cheque especially crossed, the payment can be obtained only through the particular
banker whose name appears across the face of the Cheque or his agent for collection.[Sec. 126, para2]
3. Restrictive crossing: Restrictive crossing has not been described anywhere in the Negotiable
Instrument Act. It is a type of crossing which has evolved out of business and banking usage and now
recognized by the law. Every Cheque crossed wither generally or specially may be crossed restrictively
credit the proceeds of the Cheque only to the account of the payee.
4. Not negotiable crossing: Sometimes, a Cheque crossed generally or specially contains the words
‘not negotiable’ A crossing with such words is said to be ‘not negotiable’ crossing.
The words ‘not negotiable’ on a crossed Cheque destroy the negotiable character of the
Cheque but not the transferability of the Cheque. Therefore, any person taking a crossed Cheque
bearing the words ‘not negotiable’ shall not have and shall not be capable of giving a better title to the
Cheque than the title of the person from whom he took it. [Sec. 130]
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B.Com 1st Sem.
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Parties to a Negotiable Instrument:
Holder and Holder in due course
Holder (Sec. 8, NIA)
Holder means any person entitled in his own name to the possession a promissory note bill of exchange
or cheque and to recover or receive the amount due thereon from the parties thereon. A holder must
therefore have the possession of the instrument and also the right to recover the money in his own
name.
Therefore, holder of a negotiable instrument is the person:
1. Who is entitled in his own name to the possession of the instrument, and
2. Who has the right to receive or recover the amount due thereon from the parties thereto.
Characteristics:
a) Entitled to possession of an instrument
b) Entitled to receive or recover the amount
c) Holder of lost or destroyed instrument
Who can be a Holder?
i.
Payee
ii.
Indoresee
iii.
Bearer
iv.
Legal representative or heir
Who is Not a Holder?
i.
Agent
ii.
Servant
iii.
Beneficial
iv.
Thief or finder
v.
Forged indorsee
Powers of Holder
I.
He is entitled in his own name to the possession of the instrument.
II.
He can receive or recover the amount due on the instrument.
III.
If necessary, he can sue the parties in order to recover the money due on the instrument.
IV.
He can validly discharge the instrument on payment of the instrument.
V.
He may indorse the instrument to any other person
“Holder in due course" (Sec. 9, NIA)
Holder in due course means any person who for consideration became the possessor of a promissory
note, bill of exchange or cheque, if payable to the bearer or the payee or indrosee thereof, if payable to
the order before the amount mentioned in it became payable, and without having sufficient cause to
believe that any defect existed in the title of the person from who he derived his title’
Thus, a person is a holder in due course if he satisfies the following conditions:
a) He must be a holder (possessor) of a negotiable instrument.
b) He must have become holder (possessor) of the instrument for consideration.
c) He must have become holder before maturity of the instrument.
d) He must have obtained the instrument in good faith.
e) He must have received the instrument complete and regular on the face of it.
RIGHTS AND PRIVILEGES OF HOLDER IN DUE COURSE
A holder in due course enjoys certain rights and privileges. They are available in the following
particular cases:
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In case of an inchoate instrument: Sometimes a person signs a stamped but otherwise incomplete
(inchoate) instrument and delivers it to another person. In such a case, it implies that the holder may
fill in any amount for which authority has been given by the maker.
In case of a fictitious bill: Sometimes the name of the drawer or the payee or both is fictitious in a bill.
Such a bill is called a fictitious bill. The acceptor of such a fictitious bill is not liable to the holder of the
bill. But if the same bill is passed on to a holder in due course, he will have a privilege to claim money
on it from the acceptor. [Sec.42]
In case of the liability of prior parties: A holder in due course has a privilege to hold every prior party to
a negotiable instrument liable on it until the instrument is duly satisfied. [Sec.36]
In case of instrument without consideration: Sometimes an instrument is made, drawn, accepted,
indorsed or transferred without consideration. But, if the same instrument comes into the hands of a
holder in due course, he has a privilege to recover the amount from any party thereto [Sec.43]
In case of transfer of title to a subsequent holder: A holder in due course has a privilege to transfer the
title to an instrument free from all defects to subsequent holder. Therefore, any holder of a negotiable
instrument who derives title to a negotiable instrument from a holder in due course enjoys all the
rights and privileges of that holder in due course.
In case of an instrument obtained by unlawful means or for unlawful consideration: Sometimes, a
person gets a lost instrument or obtains an instrument by means of an offence (i.e. by stealing or
defrauding). In such a case, the holder cannot claim any right against the party liable on it. But if the
same instrument is negotiated to a holder in due course, he will get good title to it.
DISTINCTION BETWEEN HOLDER AND HOLDER IN DUE COURSE
Basis of
Distinction
1. Definition
Holder
Holder is a person who is entitled in
his own name to the possession of
the instrument and to receive the
amount due on it.
2. Consideration
A holder need not necessarily
acquire
the
instrument
for
consideration. For instance, a holder
may get the instrument by way of
gift.
3.
Before A holder may obtain possession
maturity
before or after the maturity of the
instrument.
4. Good faith
A holder need not necessarily
acquire possession of the instrument
in good faith.
5.
Inchoate A holder can claim only the amount
instrument
which signer of the inchoate
instrument intended to pay.
6. Right against A holder does not have rights
prior parties
against all the prior parties. He has
rights against the original parties
and his immediate indorser.
7. Title better A holder can never get a better title
than
the than that of the transferor.
transferor
Holder in Due Course
Holder in due course is a person who
becomes the possessor of the
instrument for consideration before its
maturity and in good faith. [Sec. 9]
A holder in due course can acquire the
instrument for consideration only.
A holder in due course must obtain the
possession before maturity of the
instrument.
A holder in due course must always
acquire possession of the instrument in
good faith.
A holder in due course can claim any
amount filled in the inchoate
instrument provided it is covered by
the stamp affixed on it. [Sec. 20]
A holder in due course has rights
against every prior party to the
instrument. He can hold them liable
jointly and severally.[Sec. 36]
A holder in due course can acquire a
better title than that of the transferor.
In other words he gets the instrument
cleansed of all prior defects.
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B.Com 1st Sem.
Subject- Business Law
Negotiation
One of the essential features of a negotiable instrument is its transferability. A negotiable instrument
may be transferred from one person to another in either of the followings way1. By negotiation
2. By assignment
1) By negotiation - The transfer of an instrument by one party to another so as to constitute the
transferee a holder is called Negotiation. Negotiation means as the process by which a third party is
constituted the holder of the instrument so as to entitle him to the possession of the same and to
receive the amount due thereon in his own name.
According to section 14 of the Act, “when a promissory note, bill of exchange or cheque is transferred to
any person so as to constitute that person the holder thereof, the instrument is said to be negotiated.”
The main purpose and essence of negotiation is to make the transferee of a promissory note, a bill of
exchange or a cheque the holder there of.
Modes of negotiation (Sec. 47 and 48, NIA)
1. Negotiation by delivery (Sec. 47): Where a promissory note or a bill of exchange or a cheque is
payable to a bearer, it may be negotiated by delivery thereof.
Example: A the holder of a negotiable instrument payable to bearer, delivers it to B's agent to keep it for
B. The instrument has been negotiated.
2. Negotiation by delivery (Sec. 48):
A promissory note, a cheque or a bill of exchange payable to order can be negotiated only be
endorsement and delivery. Unless the holder signs his endorsement on the instrument and delivers it,
the transferee does not become a holder. If there are more payees than one, all must endorse it.
2) By Assignment –
When a holder of a bill, promissory note or cheque transfers the same to another, he in fact gives his
right to receive the payment of the instrument to the transferee.
Difference between Assignment & Negotiation:1) Mode of transfer- The transfer by negotiation requires only delivery with or without
endorsement of a bearer or order instrument. Whereas the transfer by assignment requires a
separate written document such as transfer deed signed by the transferor.
2) Notice of transfer-Not require in negotiation
3) Consideration-consideration must be proved in assignee.
4) Title
5) Right to sue
Endorsement
The word “endorsement” in its literal sense means, writing on the back of an instrument. But under the
Negotiable Instruments Act, it means, the writing of one’s name on the back of the instrument or any
paper attached to it with the intention of transferring the rights therein. Thus, endorsement is signing a
negotiable instrument for the purpose of negotiation. The person who effects an endorsement is called
an “endorser”, and the person to whom negotiable instrument is transferred by endorsement is called
the “endorsee”. Who may Endorse / Negotiate [Section 51]: Every Sole maker, drawer, payee or
endorsee, or all of several joint makers, drawers, payees or endorsees of a negotiable instrument may
endorse and negotiate the same if the negotiability of such instrument has not been restricted or
excluded as mentioned in Section 50.
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B.Com 1st Sem.
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When the maker or holder of a negotiable instrument signs the instrument (otherwise than as maker)
for the purpose of its negotiation, it is said to be the Endorsement of the instrument. [Section 15]
Essentials of a Valid Endorsement: Following are the essentials of a valid endorsement:
1. Indorsers must be holder: For a valid Endorsement, the indorser must be holder of the instrument.
In other words, indorser must be entitled in his own name to the possession of the instrument and
recover or receive the amount due thereon. Therefore, a person who steals or finds a lost instrument
cannot indorse the instrument because he is not a holder.
2. On the instrument: Endorsement must be on the face or back of the instrument or on a piece of
paper annexed to the instrument.
3. Signature: Endorsement must be signed by the indorser for the purpose of negotiation of the
instrument. It may be signed by the maker or holder of the instrument but the maker must not sign the
Endorsement in the capacity of the maker.
4. Additional words and form of words: Indorser may sign the Endorsement with a without
additional words or statement.
5. Endorsement by joint holders: An Endorsement is valid only when all joint holders (i.e. all makers,
drawers, indorsees or payees) join in Endorsement unless any one of them has the authority to indorse
for the others.
6. Endorsement of entire instrument: Endorsement must be of the entire instrument. An
Endorsement which purports to transfer only a part of the amount of the instrument is not a valid
Endorsement.
7. Delivery: In order to make a complete and effective Endorsement, the instrument must be delivered
by the indorser to the indorsee.
8. It must be made by the holder of the instrument.
9. It must be completed by the delivery of the instrument.
10.It must be signed by the endorser. It must be on the back or face of instrument or on a slip of
paper annexed thereto.
Persons Entitled to Indorse:
1. Payee
2. Maker, drawer or holder
3. Indorsee
4. Joint makers, drawers etc.
Kinds of Endorsements
1. Blank or general Endorsement: When the indorser signs his name only on the instrument for the
purpose of its negotiation, it is called the blank or general Endorsement. Illustration: Anta has a Cheque
payable to ‘Anta or order’ Anta merely signs on the instrument. It constitutes a blank Endorsement.
2. Full or special Endorsement: When an indorser signs his name and adds a direction to pay the
amount mentioned in the instrument to or to the order of a specified person, it is called the
Endorsement in full. Illustration: Anita is a holder of a Cheque. He writes ‘Pay Banta or Order or Pay
Banta only’ and signs the Cheque. It is a full or special Endorsement.
3. Restrictive Endorsement: Illustration: (a) ‘Pay the contents to Banta only’. (b) ‘Pay Banta for my
use’.
4. Partial Endorsement: Sometimes, an Endorsement purports to transfer only a part of the amount of
the instrument. Such an Endorsement is called as partial Endorsement. It is not a valid Endorsement for
the purpose of negotiation.
5. Conditional or qualified Endorsement: When an indorser inserts a condition in his Endorsement,
it is called a conditional Endorsement. Sometimes, an indorser by express words in the Endorsement
may exclude his liability on the instrument makes the right of the indorsee to receive the amount due
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thereon on the happening of a specified event or on the implement of some condition. In such a case,
the Endorsement is said to be conditional.
Effects of Endorsement:
1. An unconditional Endorsement of a negotiable instrument followed by an unconditional
delivery of the instrument has the following effects:
2. The property in the instrument stands transferred to the indorsee.
3. The indorsee gets the right of further negotiation of the instrument [Sec. 50]
4. The indorsee is entitled to sue all parties, whose names appear on it.
Discharge of a negotiable instrument
“Discharge means release from obligation.” Discharge can take place1) By payment in due course: The instrument is discharged by payment made in due course by
the party who is primarily liable to pay, or by a person who is accommodated in case the
instrument was made or accepted for his accommodation, The payment must be made at or
after the maturity to the holder of the instrument if the maker or acceptor is to be discharged. A
payment by a party who is secondarily liable does not discharge the instrument.
2) By party primarily liable by becoming holder (Section 90): If the maker of a note or the
acceptor of a bill becomes its holder at or after its maturity in his own right, The Negotiable
Instruments Act, 1881 4.5 instrument is discharged.
3) By express waiver: When the holder of a negotiable instrument at or after its maturity
absolutely and unconditionally renounces in writing or gives up his rights against all the parties
to the instrument, the instrument is discharged. The renunciation must be in writing unless the
instrument is delivered up to the party primarily liable.
4) By Cancellation: Where an instrument is intentionally cancelled by the holder or his agent and
the cancellation is apparent thereon, the instrument is discharged. Cancellation may take place;
by crossing out signatures on the instrument, or by physical destruction of the instrument with
the intention of putting an end to the liability of the parties to the instrument.
5) By discharge as a simple contract: A negotiable instrument may be discharged in rile same
way as any other contract for the payment of money. This includes for example, discharge of an
instrument by innovation or rescission or by expiry of period of limitation.
Dishonour of a negotiable instrument
An instrument is said to be dishonored when the acceptance and/or payment is refused on a duly
presented instrument. Thus, a negotiable instrument may be dishonored in two ways:
1. by non acceptance, and
2. by non payment
Dishonor by Non-acceptance:
Only a bill may be dishonored by non acceptance. A bill is deemed to be dishonored by non acceptance
in any of the following cases:
a. Refused to accept
b. Not signed by all the drawees
c. Not accepted by any partner
d. Bill not accepted within forty eight hours.
e. Drawee could not be found
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Dishonour by Non-payment:
a. Default in payment
b. When excused from presentment
On the dishonour of a cheque, one can file a suit for recovery of the cheque amount along with the cost
& interest under order XXXVII of Code of Civil Procedure 1908 (which is a summary procedure and)
can also file a Criminal Complaint u/s 138 of Negotiable Instrument Act for punishment to the signatory
of the cheque for haring committed an offence. However, before filing the said complaint a statutory
notice is liable to be given to the other party.
NOTICE OF DISHONOUR
When a negotiable instrument is dishonored by non acceptance (bill) or by non-payment, the holder
may sue against the parties liable for the same. But he can do so only when he has served a formal
notice to the effect.
The notice of dishonor is necessary for two reasons:
a. To warn the party about his liability.
b. To secure rights of the holder
Notice by Whom?
The notice of dishonor may be given by any of the following:
i.
By the holder.
ii.
By any party receiving the notice of dishonor. He may do so if he wants to hold any prior
party liable to himself.
iii.
By an agent of the holder
Notice to Whom?
i.
To all prior parties.
ii.
To some one of the several parties.
iii.
To an agent of the person.
iv.
To the legal representative, in case the party liable is dead.
v.
To the official assignee, in case the party liable has been declared insolvent.
Time and Place of Notice:
i.
The notice must be given within a reasonable time after dishonour.
ii.
The notice must be given at the place of business. In case the party has no place of business, it
must be given at the residence of the party.
Dishonour of certain cheques for insufficiency of funds
Provided that nothing contained in this section shall apply unless(a) the cheque has been presented to the bank within a period of three months from the date on which
it is drawn or within the period of its validity, whichever is earlier;
(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the
payment of the said amount of money by giving a notice in writing, to the drawer of the cheque within
thirty days of the receipt of information by him from the bank regarding the return of the cheque as
unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or
as the case may be, to the holder in due course of the cheque within 15 days of the receipt of the said
notice.
Explanation - For the purposes of this section, debt or other liability means a legally enforceable debt
or other liability.
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Ingredients of the offence under Section 138, NIA: It is manifest that to constitute an offence under
Section 138 of NIA, the following ingredients are required to be fulfilled:
1. a person must have drawn a cheque on an account maintained by him in a bank for payment of
a certain amount of money to another person from out of that account for the discharge, in
whole or in part, of any debt or other liability; that cheque has been presented to bank within a
period of three months from the date on which it is drawn or within the period of its validity
whichever is earlier;
2. that cheque is returned by the bank unpaid, either because of the amount of money standing to
the credit of the account is insufficient to honour the cheque or that it exceeds the amount
arranged to be paid from that account by an agreement made with the bank;
3. the payee or the holder in due course of the cheque makes a demand for the payment of the said
amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of
the receipt of information by him from the bank regarding the return of the cheque as unpaid;
4. The drawer of such cheque fails to make payment of the said amount of money to the payee or
the holder in due course of the cheque within 15 days of the receipt of the said notice.
Section 139 - Presumption in favour of holder
It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of
the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.
The effect of these presumptions is to place the evidential burden on the accused of proving that the
cheque was not received by the complainant towards the discharge of any liability. Because both
sections 138 and 139 require that the court shall presume the liability of the drawer of the cheques for
the amounts for which the cheques are drawn…it is obligatory on the courts to raise this presumption
in every case where the factual basis for the raising of this presumption had been established. It
introduced an exception to the general rule as to the burden of proof in criminal cases and shifts the
onus on to the accused.
NOTING
Meaning – Noting is the process of recording the fact and reasons of dishonor of negotiable instrument
by the notary public upon the dishonored instrument. In other words, noting consists of recording and
authenticating the fact and reasons of dishonor of a negotiable instrument by the notary public.
Need – Noting is not compulsory in the case of an inland bill or note. But noting serves as an authentic
and official proof of dishonor of an instrument by non acceptance or non-payment. It serves as an
evidence of dishonor of a negotiable instrument in the legal proceedings before the Court.
Procedure of Noting – When a promissory note or a bill of exchange is dishonoured, the holder may
request within a reasonable time after its dishonor to a notary public for its noting. On receipt of the
request, the notary public takes following steps:
The notary public makes a formal demand upon the acceptor or maker for acceptance or payment. It
may be noted that such demand may be made either by the notary public personally or by his clerk. If
authorized by agreement or usage, the demand may be made by a registered letter.
When it is not then accepted or paid, the notary public records the fact of dishonor upon the
instrument, or upon a paper attached thereto or party upon each.
Such a note must specify the following things:
a) The fact of dishonour.
b) The date of dishonor of the instrument.
c) The reasons, if any, assigned for such dishonor.
d) If the instrument has not been expressly dishonored, the reasons why the holder treats it as
dishonored.
e) The notary’s charges. [Sec. 99]
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In addition, the notary public also makes a reference of his register and puts signature with seal on the
instrument.
PROTEST
Protest is a certificate issued by a notary public attesting the fact of dishonor of a negotiable instrument
recorded upon the dishonored instrument.
Contents of protest
1. The instrument itself or a literal transcript of it which must contain everything written or
printed thereon.
2. The name of the person for whom and against whom the instrument has been protested.
3. A statement that payment or acceptance, or better security (as the case may be) has been
demanded of such person by the notary public; and the terms of his answer, if any
4. If the person gave no answer, or that he could not be found a statement to that effect.
5. The date, place and time of dishonor of the instrument. If better security has been refused; the
place and time of refusal.
Distinction between Noting and Protest
The notice is different from protest on the following grounds:
Nature - Noting consists of recording the fact and reasons of dishonor of a negotiable instrument upon
the instrument. Protest is a certificate as to fact and reasons that an instrument has been dishonored or
the acceptor has refused to give a better security for the bill.
Contents - The contents of noting are limited to the date and reasons (express or implied) of dishonor.
But contents of protest are more detailed as specified under Section 101.
Scope - Noting can be done even without protest but protest is issued only after the noting has been
done.
Requirement - Noting is optional in case of inland bill or note. But a foreign bill must be protested if it
is required by the law of the place where they are drawn.
Conclusion
Negotiable Instruments plays a major role in the trade world. We can also see the use of negotiable
instruments in the international trade. We can assume that the international trade is also developing
with the negotiable instrument. The nature of negotiable instrument is an area of law which has major
influence on any person in his professional field. Negotiable instrument plays a major role in different
part of the world in raising the economy. The negotiable instrument is of contractual in nature and it
characterizes the fact that it is negotiable.
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UNIT-IV
CONSUMER PROTECTION ACT 1986
Introduction
The Consumer Protection Act, 1986 has been enacted to provide for the establishment of consumer
councils and other authorities for the settlement of consumers’ disputes and for matters connected
therewith. In fact, the basic motive of enacting this important Act is to provide cheaper and speedy
remedies to the consumers who are in disadvantageous position in comparison with the traders who
are well organised and rule the market.
The Consumer Protection Act, 1986’ extends to the whole of India except the State of Jammu &
Kashmir, and save as otherwise expressly provided by the Central Government, this Act shall apply to
all goods and services [Section 1]. The Act has come into force on 15.4.1987*
Objects of the Act
The objects of the Act are as follows:
1.
Better protection of interests of consumers. The Act seeks to provide for better protection
of the interests of consumers. For that purpose, the Act makes provision for the establishment
of Consumer Councils and other authorities for the settlement of consumer disputes and for
matters connected therewith.
2.
Protection of rights of consumers. The Act seeks, inter alia, to promote and protect the
rights of consumers such as—
a) The right to be protected against marketing of goods or services which are hazardous
to life and property ;
b) The right to be informed about the quality, quantity, potency, purity, standard and price
of goods or services so as to protect the consumers against unfair trade practices ;
c) The right to be assured, wherever possible, access to goods and services at competitive
prices ;
d) The right to be heard and to be assured that consumers' interest will receive due
consideration at appropriate forums ;
e) The right to seek redressal against unfair trade practices or restrictive trade practices or
unscrupulous exploitation of consumers ; and
f) right to consumer education.
3.
Consumer Protection Councils. The above objects are sought to be) promoted and protected
by the Consumer Protection Councils established at the Central and State levels.
4.
Quasi-Judicial machinery for speedy redressal of consumer disputes. The Act seeks to
provide speedy and simple redressal to consumer disputes. For this purpose, there has been set
up a quasi-judicial machinery at the district, State and Central levels.
IMPORTANT DEFINITION
COMPLAINANT Sec. 2(1) (13)
“Complainant” means(i)
a consumer; or
(ii)
any voluntary consumer association registered under the Companies Act, 1956 (1 of 1956).
Or under any other law for the time being in force; or
(iii)
the Central Government or any State Government, who or which makes a complaint;
(iv)
one or more consumers, where there are numerous consumers having the same interest
(v)
in case of death of a consumer, his legal heir or representative*”
COMPLAINT Sec. 2(1) (C)
“Complaint” means any allegation in writing made by a complaint that(i) an unfair trade practice or a restrictive trade practice has been adopted by any trader; or service
provider*
(ii) the goods bought by him or agreed to be bought by him; sufferfrom one or more defect;
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(iii) the services hired or availed of or agreed to be hired or availed by him suffer from deficiency in
any respect;
(iv) a trader or the service provider has charged for the goods or for the service mentioned in the
complaint a price in excess of the price (a) fixed by or under any law for the time being in force, (b)
displayed on the goods or any package containing such goods, (c) displayed on the price list
exhibited by him, (d) agreed between the parties.
(v) Goods which will be hazardous to life and safety when used, are being offered for sale to the public
in contravention of any law for the time being in force.
(vi) service which are hazardous or likely to be hazardous to life and safety of the public when used*”
CONSUMER Sec. 2(1) (D)
‘consumer’ means any person who:
(i) Consumer of goods buys any goods for a consideration which has been paid or promised or
partly paid and partly promised, or under any system of deferred payment and includes any
user of such goods other than the person who buys such goods for consideration paid or
promised or partly paid or partly promised, or under any system of deferred payment when
such use is made with the approval of such person, but does not include a person who obtains
such goods for resale or for any commercial purpose; or
(ii) Consumer of services hires or avails of any services for a consideration which has been paid or
promised or partly paid and partly promised, or under any system of deferred payment and
includes any beneficiary of such services other than the person who hires or avails of the
services for consideration paid or promised, or partly paid and partly promised, or under any
system of deferred payment, when such services are availed of with the approval of the first
mentioned person;”
CONSUMER DISPUTE
“Consumer dispute” means a dispute where the person against whom a complaint has been made,
denies or disputes the allegations contained in the complaint;
DEFECT
“defect’ means any fault, imperfection or shortcoming in the quality, quantity, potency, purity, or
standard which is required to be maintained by or under any law for the time being for or under any
contract, express or implied or as it claimed by the trader is any manner whatsoever in relation to any
goods;”
“manufacture” means a person who(i) makes or manufactures any goods or parts thereof : or
(ii) does not make or manufacture any goods but assembles parts thereof made or manufactured by
other; or
(iii) puts or causes to be put his own mark on any goods made or manufactured by any other
manufacture.
PERSON
“person” includes(i)
a firm whether registered or not;
(ii)
a Hindu undivided family;
(iii)
a co-operative society
(iv)
every other association of persons whether registered under the Societies Registration Act.
Consumer Disputes Redressal Agencies
Three-Tier Redressal System
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Introduction
The object of the Consumer Protection, 1986, is to provide better protection to consumers. To secure
this object, the Act intends to provide simple, speedy and inexpensive redressal to the consumers’
grievances. For this purpose, the Act provides for the establishment of three-tier quasi-judicial
machinery at the District, State and National levels. The three consumer disputes redressal agencies
at the different levels are as under:
1. Consumer Disputes Redressal Forum to be known as District Forum at the District level.
2. Consumer Disputes Redressal Commission to be known as State Commission at the State level.
3. National Consumer Disputes Redressal Commission to be known as National Commission at the
National level.
ESTABLISHMENT OF AGENCIES
1 DISTRICT FORUM
The ‘District Forum’ is the short name of the Consumer Disputes Redressal Forum established in the
District under Section 9(a) of the Consumer Protection Act, It is the redressal agency to deal with the
complaints of the consumers at the District level.
Legal provision relating to District forum:
1. Composition of the district forum
The District Forum is a body of three persons appointed by the State Government. The
qualifications of the President and other members are as follow:
(a) President: A person who is, or has been or is qualified to be, a District Judge shall be the
President of the District Forum.
(b) Other Member: A part from the President, the District Forum shall consist of two other
members one of whom shall be a woman. The qualification for appointment of other members
are:
(i)
He/She must not be less than 36 years of age.
(ii)
He/She must possess a bachelor’s degree from a recognised university.
(iii)
He/She must be a person of ability, integrity and standing and have adequate
knowledge and experience of at least 10 years in dealing with problems relating to
economics, law, commerce, accountancy, industry, public affairs or administrations.
2. Appointment of members of District Forum: The appointment of the President and of the
members shall be made by the State Government on the recommendation of the selection
committee consisting of (a) the President of the State Commission, (b) Secretary, Law
Department of the State, and (c) Secretary, in charge of the Department dealing with consumer
affairs in the State.
3. Disqualifications of members :
a) If he has been convicted and sentenced to imprisonment for an office, which, in the opinion of
the State Government, involves moral turpitude, or
b) If he is an undercharged insolvents, or
c) If he is of unsound mind and stands so declared by a competent court, or
d) If he has been removed or dismissed from the services of the Government or a body corporate
owned or controlled by the Government,
4. Tenure of office of the members of the District Forum
A person may act as a President or a member of the District Forum for 5 years or up to the age
of 65 years, whichever is earlier. Thus, in any case, a person cannot hold the office of the President
or that of the member beyond the age of 65 years.
5 Vacancy in the office of the District Forum
The officer of the President or of any member of the forum may become vacation on his
attaining the age of sixty-five years.
5. Jurisdiction of the District Forum
The District Forum has the jurisdiction to entertain complaints where the value of the goods or
services and the compensation, if any, claimed does not exceed rupees 20 lakhs.
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The limit has been enhanced from Rs. 5 lakhs by the Consumer Protection (Amendment) Act 2002
PROCEDURE ON RECEIPT OF COMPLAIN SECTION-13
The district forum has to observe the procedure mentioned in section. It may be summarised as
followsI. Reference of complaint to opposite party – Whenever the district forum receives a complaint,
relating to a goods, it should refer a copy of the complaint to the opposite party. It must be given
within 30 days of receiving the complaint. However, it may be extended by a further period not
exceeding 15 days.
II. On refusal or dispute by opposite party – When the opposite party, on receipt of a complaint,
refusal/disputes the allegations contained in the complaint or fails to take any action within the time
given by the district forum, the forum shall proceed to settle the consumer dispute in the following
manner –
1. Reference of sample to laboratory
2. Deposit of fees
3. Forwarding of report to opposite partly
4. Objection by any of the parities.
5. Reasonable opportunity to parties of being heard and issue order.
Who can complaint in the district forum
A complaint in relation to any goods sold or delivered or any serviced provided may be filed with a
district forum by –
1. Consumer of goods/service
2. Any recognized consumer association.
3. Central or state government
For the purpose of this section “recognised consumer association” means any voluntary consumer
association registered under the companies Act 1956 or any other law for the time being in force (Sec.
12)
Power of the District forum –
The district forum shall have the same power as are vested in a civil court under the code of civil
procedure, 1908 while typing a suit in respect of the following matter, namely1. The summoning and enforcing attendance of any defendant or witness and examining the itness
on oath.
2. The discovery and production of any document or other material object producible as evidence.
3. The reception of evidence on affidavits
4. The requisitioning of the report of the concerned analysis or test from the appropriate
laboratory or form any other relevant source.
5. Issuing of any commission for the examination of any witness and
6. Any other matter which may be prescribed.
Every proceeding before the district forum shall be deemed to be a judicial proceeding within the
meaning of Sec. 193 and 228 of the Indian Penal code; 1860 and the District forum shall be deemed to
be a civil court for the purposes of Sec. 195 and chapter XXVI of the code of criminal procedure 1973.
Findings of the District forum (Sec. 14)
If the district forum is satisfied that the goods suffer from any of the defects specified in the complaint
or that any of the allegations contained in the complaint about the services are proved, it shall issue an
order to the opposite party directing him to take one or more of the following things namelya) To remove the defect pointed out by the appropriate laboratory from the goods in question.
b) To replace the goods with new goods of similar description which shall be free from any defect.
c) To return to the complaint the price or as the case may be the charge paid by the complaint.
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STATE COMMISSION
‘State Commission’ is the short name given to the Consumer Disputes Redressal Commission
established in the State under Section 9(b) of the Consumer Protection Act, 1986 [Section] 2(1) (p).
It is the redressal agency to deal with the complaints of the consumers at the State level.
Legal provision relating to District forum
Composition of the State Commission
Section 16(1) makes the following provisions regarding the qualifications of the President and
other members:
(a) President: A person who is or has been a judge of a High Court shall be the President of the
State Commission.
(b) Other members: Apart from the President, the State Commission shall consist of two other
member one of whom shall be a woman. The qualifications for appointment of the other
member are:
(i)
He/She must not be less than 35 year of age.
(ii)
He/She must possess a bachlor’s degree from a recognised university.
(iii)
He/She must be a person of ability, integrity and standing and have adequate
knowledge or experience of at least 10 years in dealing with problems relating to
economics, law, commerce, accountancy, industry, public affairs or administration.
1. Appointment of members of State Commission
The appointment of the President shall be made by the State Government after consultation with
the Chief Justice of the High Court of the State. And the appointment of the other members shall be
made by the State Government on the recommendation of the selection committee consisting of (a)
President of the State Commission, (b) Secretary of the Law Department of the State and (c)
Secretary, in charge of Department dealing with consumer affairs in the State.
2. Disqualification of members
These disqualifications are the same as already discussed the District Forum.
3. Tenure of office of the members of the State Commission
The President or the member of the State Commission shall hold office for a term of 5 years or
up to the age of 67 year, whichever is earlier. Thus, in any case, a person cannot hold the office of
President or that of a member beyond the age of 67 years.
4. Jurisdiction of the State Commission
(a) Pecuniary jurisdiction: The State Commission has the jurisdiction to entertain
complaints where the value of the goods or services and compensation, if any, claimed
exceeds rupees 20 lakhs but does not exceed rupees one crore.
(b) Appellate jurisdiction: Any person aggrieved by an order made by the District Forum
may prefer an appeal to the State Commission with a period of 30 days from the date of
the order.
NATIONAL COMMISSION
The ‘National Commission’ is the short name given to the National Consumer Disputes Redressal
Commission established in the country under Section 9(c) of the Consumer Protection Act, 1986.
Legal provision relating to District forum
1. Composition of the National Commission
The ‘National Commission’ is a body of minimum five persons appointed by the Central Government.
Legally, the National Commission shall consist of a President and at least four other members.
(a) President: A person who is or has been a judge of the Supreme Court shall be the President of
the National Commission. Thus, only the sitting or retired judges of the Supreme Court are
eligible for appointment as President.
(b) Other members: A part from the President, the National Commission shall consist of at least
four other members one of whom shall be a woman. The qualifications for appointment of
other members are:
(i)
He/She must not be less than 35 year of age.
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(ii)
He/She must possess a bachlor’s degree from a recognised university.
He/She must be a person of ability, integrity and standing and have adequate knowledge or
experience of at least 10 years in dealing with problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration.
2. Appointment of the members of the National Commission [Section 20(1) (a) (b):
The appointment of the President shall be made by the Central Government after consultation
with the Chief Justice of India .The appointment of the other four members shall be made by the Central
Government on the recommendation of the selection committee consisting of (a) sitting judge of the
Supreme Court, (b) Secretary in the Department of Legal Affairs, Government of India, (c) Secretary of
the Department dealing with consumer affairs in the Government of India
3. Disqualification of members
These disqualifications are the same as already discussed in case of members of District Forum
and of State Commission. Any other disqualification may also be prescribed the Central
Government.
4. Tenure of office of the members of the National Commission
The President or the members of the National Commission shall hold the office for a term of 5 year
or up to the age of 70 years, whichever is earlier. Thus, in any case, a person cannot hold the office
of President or that of a member beyond the age of 70 years.
5. Jurisdiction of the National Commission
(a) Pecuniary jurisdiction: The National Commission has the jurisdiction to entertain
complaints where the value of the goods or services and compensation, if any claimed
exceeds rupees 1 crore .Prior to the Consumer Protection (Amendment) Act, 2002, the
National Commission had the jurisdiction where the value of this claim exceeded rupees
twenty lakhs.
(b) Appellate jurisdiction: The National Commission also has the appellate jurisdiction to
entertain appeals against the order of any State Commission.
CONSUMER PROTECTION COUNCILS
Consumer protection councils have been set up at national and state levels. Their object is to protect
rights of consumers. Provisions with regard to consumer protection councils are contained in the
consumer protection act wide section 4 to 8.
II. Central consumer protection Council –
1. Establishment of this council by a notification of the central government.
2. Central government nominates government and private members from different departments
and sectors.
3. At present there are 150 members in the council.
4. Chairman of the council is central government food & civil supplies minister.
5. 3 years term of office of council.
6. If any post of the council falls vacant, it shall be filled up by a same cadre member.
7. 3 meetings are compulsory in a year time and place is fixed by chairman.
8. Main object of council is to expand and protect the rights of consumers.
- Protection against fatal advertisement of goods/for human life services.
- Protection against improper trade transaction and service.
- As far as possible, a right of satisfaction about the various qualities.
- A right of belief and confidence on goods & services.
- A right of compensation against mis-behaviour in restricted trade polices.
- A right of consumer education.
III. State consumer protection council –
1. Establishment of this council by notification of state government.
2. Chairman of the council is state minister of food and civil supplies.
3. State government nominated government or private member from different sectors.
4. There must be at least two meetings in a year or arrange according to convened any time.
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5. Time and place of meetings shall be fixed by the chairman.
6. Object of council is to protect the interest and rights of consumer in state which is same central
council.
APPROPRIATE LABORATORY [Sec. 2(1) (a)]
If means a laboratory or organization –
1. Recognised by central government
2. Recognised by state government, subject to guidelines as may be prescribed by central government.
3. Any laboratory or organization established by or under any law for the time being in force, which is
maintained, financed or aided by the central government or state government.
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UNIT-V
FEMA 1999 (FOREIGN EXCHANGE MANAGEMENT ACT)
In the context of the ongoing process of economic liberalization, need for better foreign exchange
management was felt. Therefore, the Foreign Exchange Regulation Act (FERA) 1973 was reviewed in
1993 in the light of the developments 84. experience in relation to foreign trade & investment. The
Government came to the conclusion that a better course would be to repeat the existing FERA & enact a
new legislation. Therefore, this new Act i.e. Foreign Exchange Management Act (FEMA), 1999 was
enacted to replace & repeat the FERA, 1973. The FEMA, 1999 was passed by Lok Sabha on 2 Dec. 1999
& received the assent of the President of India on 9 Dec. 1999.
Extent, Application and Commencement:
1.
The Foreign Exchange Management Act extents to the Whole of India.
2.
It shall also apply to all Branches, offices and agencies outside India owned or controlled by a
person resident in India and also to any contravention there under committed outside India by
any person to whom this Act applies. Thus, the Act has extra territorial jurisdiction.
3.
It shall come into force on such date as the Central government may, by notification in the
Official Gazette, appoint.
It may be noted that this Act came into effect from 1st June, 2000 Objectives of FEMA The main
objectives of this Act are as follows —
1.
To consolidate & amend the law relating toioreign exchange.
2.
To facilitate external trade & payments.
3.
To promote the orderly development & maintenance of foreign exchange markets in India.
terminology
1.
Capital Account Transaction — CAT means a transaction which alters the assets or liabilities
outside India of persons resident in India or assets or liabilities in India of person's resident
outside India, & includes transaction referred in Section 6 (3). [Sec 2(e)].
2.
Currency — Currency includes all currency notes, postal notes, postal orders, money orders,
cheques, drafts, traveler's cheques, letters of credit, bills of exchange & promissory notes, credit
cards or such other similar instruments as may be notified by the Reserve Bank of India (RBI).
[Sec. 2(h)]
3.
Currency Notes — It means & includes cash in the form of coins & bank notes [Sec. 20)1
4.
Current Account Transaction — CAT means a transaction other than a capital account
transaction & includes the following transactions.
a. Payments due in 'connection with foreign trade, other current business, services &
short-term banking & credit facilities in the ordinary course of business.
b.
Payments due as interest on loans & as net income from investments.
c.
Remittances for living expenses of parents, spouse & children residing abroad.
d.
Expenses in connection with foreign travel, education & medical care of parents, spouse &
children [Sec. 2(f)]
5. Export — Export means:
a.
The taking out of India to a place outside any goods, &
b.
Providing services from India to any person outside India. [Sec. 2(I)]
6. Import— It means bringing into India any goods or services. [Sec. 2(p)].
7. Foreign Currency— It means any currency other than Indian currency. (Sec. 2(m)]
8. Foreign Exchange — it means foreign currency & includes the following:
a.
Deposits credit and balances payable in any foreign currency.
b.
Drafts traveler's cheques, letters of credit or bills of exchange, expressed or drawn in Indian
currency but payable in any foreign currency.
c.
Drafts, traveler's cheques, letters of-credit or bills of exchange drawn by banks; institutions or
persons outside India, but payable in Indian Currency. (Sec. 2(n)]
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9 Security — Security mer.ns shares, stocks, bonds and debentures, Government securities, savings
certificates, deposit receipts in respect of deposits of securities and units of the Unit Trust of India or of
any mutual fund. The term also includes certificates to title to securities and government promissory
notes. But it does not include bilk of exchange or promissory notes other than Government promissory
notes or any instruments which may be notified by the RBI as security for the purpoSes of this Act. [Sec.
2(Za))
10. Foreign Security — Foreign security means any security, in the form of shares, stocks, bonds,
debentures or any other instrument denominated or expressed in foreign currency. The term security
also includes securities expressed in foreign currency, but where redemption or any form of return
such as interest or dividends is payable in Indian currency. [Sec.2 (o)].
11. Indian Currency — Indian currency means which is expressed or drawn in Indian rupees but does
not include special bank notes and special One rupee notes issued under Section 28A of the Reserve
Bank of India Act, 1934. [Sec. 2 (q)]
12. Persons — Person includes the following:
a.
An individual
b.
A Hindu Undivided Family (HUF).
c.
A company
d.
A firm
e.
An association of persons or a body of individuals, whether incorporated or not.
f.
Every artificial juridical person, not failing within any of the [receding sub-clauses.
g.
Any agency, office or branch owned or controlled by such person. (Sec. 2(u)}.
13. Person resident in India — Persons resident in India includes the following:
a.
A person who is residing in India for more than 182 days except (a) a person who stays outside
India for any purpose (e.g. employment or business) and (b) a person who stays in India for any
purpose for an uncertain period.
b.
A body corporate registered in India.
c.
An office or branch or agency outside India owned or controlled by a person resident in India.
[Sec. 2 (w)].
14. Person resident outside India - Person resident outside India means a person who is not resident in
India. (Sec. 2(w))
15. Repatriate to India - Repatriate to India means bringing into India the realized foreign exchange,
and:
a.
The selling of such foreign exchange to an authorized person in India in exchange for rupees, or
b.
The holding of realized amount in an account with an authorized person in India to the extent
notified by the RBI.
The term also includes use of the realized amount for discharge of a debt on liability denominated in
foreign exchange. [Sec. 2 (y)]
16. Service - Service means, service of any description which is made available to potential users.
Service also includes the provision of facilities in connection with banking, financing, insurance,
Medical assistance, legal assistance, chit fund, real estate, transport, processing, supply of electrical or
other energy, boarding or lodging or both, entertainment, amusement or the purveying of news or
other information. But it does not include the rendering of any service free of charge or under a
contract of personal service. [Sec. 2 (zb)].
17. Transfer - "Transfer" includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other
form of transfer of light, title, possession or lien. (Sec. 2 (ze))
Regulation and Management of Foreign Exchange
The provisions with regard to the following aspects of regulation and manageinant of ford& exchange
are as follows I.
Provisions as to transactions in foreign exchange, security etc - ACcording to these provisions
[Sec. 3], no person shall do the following except as per the provisions of FEMA rules and regulations
made under it or with the general or special permission of the RBI:.
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1.
No person shall deal in or transfer any foreign exchange or foreign security to any person other
than an authorized person.
2.
No person shall make any 'payment to-or for the credit of any person resident outside India in
any manner.
3.
No person shall receive (otherwise through an authorized person) any payment by order or on
behalf of any person resident outside India.
4.
No person shall enter into any financial transaction in India as consideration for or in
association with acquisition or creation or transfer of a right to acquire any asset outside India
by any person.
II.
Provisions as to holding in foreign exchange, security etc. by residents - No person, resident in
India, shall acquire, hold, own, possess or transfer any (i) foreign exchange, (ii) foreign security, or (iii)
any immovable property situated outside India except as provided in this Act. [Sec.4)
III. Provisions as to current account transactions-Any person may sell or draw foreign exchange to or
from an authorizes person if such sale or drawl is a current account transaction. But the Central
Government may, in public interest and in constitution with the RBI, impose such reasonable
restrictions for current transductions as may be prescribed. [Sec. 5]
IV.
Provisions as to capital account transactions-Any person may sell or draw foreign exchange to
or from an authorized person for a capital account transaction subject to the rules specified by
the RBI. [Sec 6(1)]. However, the RBI may, in consultation with the Central Government specify
the following —
1.
Any class or classes of capital account transactions which are permissible.
2.
The limit up to which foreign exchange shall be admissible for such transactions. But the RBI
shall not impose any restriction on the drawal of foreign exchange for payments due on account
of amortization of loans or for depreciation of direct investments in the ordinary course of
business. [Sec. 6 (2)]
V.
Provisions as to export of goods and services — Certain provisions have been incorporated in
FEMA
with a view to ensure repatriation of the foreign exchange earned by export of goods and services.
These provisions are as follows in the form of duties of exporters —
1.
Furnishing declaration as to the facts relating to export — Every exporter of goods shall furnish
to the PSI or to such other authority a declaration in such form and in manner as may be
specified. The declaration shall contain true and correct mail-jai particulars, including the
amount representing the full export value. [Sec. 7 (1) (a)].
2.
Furnishing information to RBI — Every exporter of goods shall furnish to the RBI or to such
other information as may be required by the RBI for the purpose of ensuring the realization of
the export proceeds by such exporter. [Sec. 7 (1) (b)].
3.
Duty of exporter of services — Every exporter of services shall furnish to the 1161 or to such
other authorities a declaration in such form and in such manner as may be specified. The
deelaration shall contain the true and correct material particulars in relation:, to payment for
such services. [Sec. 7 (3)]
VI.
Provisions as to realization and repatriation of foreign exchange — Where any amount of
foreign exchange is due or has accrued to any person resident in India, such person shall take
all reasonable steps to realize and repatriate to India such foreign exchange within such period
and in such manner as may be specified by the RBI. [Sec. 8)
Exemption from Holding and Repatriation —
In the following cases, foreign exchange earned can be held or invested outside India (i.e. against
Section 4) or need not be repatriated (i.e. against Section 8) to India [Sec.9):
1.
Possession of foreign currency up to specified limit
2.
Holding foreign currency account
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3.
4.
5.
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Subject- Business Law
Foreign exchange received before July, 1947
Foreign exchange acquired by way of gift or inheritance
Foreign exchange acquired abroad
Any other receipt specified by RBI
Authorized Person
Authorized person means an authorized dealer, money changer, off-shore banking unit or any other
person authorized to deal in foreign exchange or foreign securities. [Sec. 2 (c)].
INTELLECTUAL PROPERTY ACT
Intellectual property (IP) is the creation of human intellect. It refers to the ideas, knowledge, invention,
innovation, creativity, and research etc, all being the product of human mind and is similar to any
property, whether movable or immovable, wherein the proprietor or the owner may exclusively use his
property at will and has the right to prevent others from using it, without his permission. The rights
relating to intellectual property are known as 'Intellectual Property Rights'
Copyrights
In India the first Copyright Act was passed in the year 1914. At present, the Copyright Act, 1957
(hereinafter referred to as the Act) governs copyright law in India. The original Act of 1957 has been
amended in the year 1983, 1984, 1992, 1994, and recently in 1999.
What is copyright?
Like trade marks, a copyright is an intangible property. The subject matter of copyright, the thing
protected is called a “work”. Copyright subsists throughout India in
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(a) original literary, dramatic, musical and artistic works
(b) cinematograph film and
(c) sound recording (Section 13).
These terms are defined in the Act. Apart from these works, no other work is entitled to copyright
under the Act.
Section 14 of the Act defines a Copyright for the purposes of the Act. “A Copyright means the exclusive
right to do or authorise the doing of acts in respect of a work or any substantial part thereof.”
Which are these acts?
1. Literary, dramatic or musical work: The owner has exclusive right to reproduce work in any
material form including the storing of it in any medium by electronic means, to issue copies to the
public, to perform or communicate the work to the public, to make cinematograph or sound recording
in respect of the work, to translate or make any adaptation of the work. [14(a)].
2. Computer programmes: In addition to the above rights, the owner has exclusive right to sell or give
on hire, or offer for sale or hire any copy of the programme.The Copyright (Amendment) Act, 1999 has
added one more right; i.e., to sell or give on commercial rental or offer for sale or for commercial rental
any copy of the programme. [14(b)].
3. Cinematograph film: A producer has exclusive right to make copy of the film including photograph
of any image forming part thereof, to sell or give on hire, or offer for sale or hire any copy of the film, to
communicate the film to the public.
4. Sound recording: A composer has exclusive right to make any other sound recording embodying it,
or offer for sale or hire any copy of the film, to communicate the film to the public. [14(e)].
Rights conferred by section 14 upon the author are the economic rights, because exploitation of the
work by himself or by licensing it for royalty may bring economic benefit to the author.
Object of copyright law is to encourage authors, composers and artists to create original works by
giving them exclusive right for limited period to reproduce the work for the benefit of the public. It is a
negative right to prevent others from copying their work
Term of copyright
Copyright is not a perpetual right. It exists for a specific term. After the expiry of the term, the work falls
in the public domain and open to public to use without permission of the owner. For literary,
dramatic, musical and artistic works the term is 60 years from the death of the author; for
photograph, cinematograph film, sound recording 60 years from the beginning of the calendar
year next following the year in which it is published/ released.
REGISTRATION OF COPYRIGHT (Section 44-58)
The provisions relating to copyright registration are as follows:
1.
Register of Copyrights
There shall be kept at the Copyright Office a register in the prescribed form to be called the
Register of Copyright in which may be entered the names or titles or works and the names and
addresses of authors, publishers and owners of copyright and such other particulars as may be
prescribed. [Section 44]
Registration of Copyright [Sec. 44]
Registration of Copyright is optional. The Act does not deprive an author of the right conferred
by this Act on account of the non-registration. The main benefit of the registration is that it is a prima
facie evidence in the favour of person claiming the copyright.Copyright may be registered with
Registrar of Copyright by filling Form No. 4 prescribed for this purpose.
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2.
Entries in register of Copyrights
1.
The author or publisher of, or the owner of or other person interested in the copyright,
in, any work may make an application in the prescribed form accompanied by the
prescribed fee to the Registrar of Copyrights for entering particulars of the work in the
Register of Copyrights.
2.
On receipt of an application in respect of any work under sub-section (1), the Registrar
of Copyrights may, after holding such inquiry as he may deem fit, enter the particulars of
the work in the Register of Copyrights. [Section 45]
3.
Form and inspection of register
The Register of Copyrights and indexes thereof kept under this Act shall at all reasonable times
be open to inspection, and any person shall be entitled to take copies of, or make extracts from;
such register or indexes on payment of such fee and subject to such conditions as may be
prescribed. [Section 47]
Register of Copyrights
Register of Copyrights to be prima facie evidence of particulars entered therein. The Register of
Copyrights shall be prima facie evidence of the particulars entered therein and documents
purporting to be copies of any entries therein. [Section 48]
Correction of entries in the Register of Copyrights
The Registrar of Copyrights may, in the prescribed cases and subject to the prescribed
conditions, amend or alter the Register of Copyrights by—
(a)
Correcting any error in any name, address or particulars ; or
(b)
Correcting any other error which may have arisen therein by accidental slip or
omission. [Section 49]
Rectification of Register by Copyright Board.
The Copyright Board, on application of the Registrar of 'Copyright or of any person aggrieved,
shall order the rectification of the Register of Copyrights by—
(a)
the making of any entry wrongly omitted to the register, or
(b)
the expunging of any entry wrongly made in, or remaining on, the register, or
(c)
the correction of any error or defect in the register. [Section 50]
Entries in the Register of Copyrights, etc. to be published.
Every entry made in the Register of Copyrights or the particulars of any work entered under
section 45, the correction of every entry made in such register under section 49, and every
rectification ordered under section 50 shall be published by the Registrar of Copyrights in the
Official Gazette or in such other manner as he may deem fit. [Section 50A] 1
4.
5.
6.
7.
Assignment of Copyright [Sections 18-21]
Assignment means transfer of ownership. Copyright is personal moveable property capable of being
transferred by assignment. Copyright is a bundle of rights which may be assigned wholly or partially.
The assignee becomes the owner of all that which is assigned to him and he alone can sue for the
infringement of the rights assigned.
Assignment must be done in writing and it must be stamped according to provisions of Indian Stamp
Act
Copyright being a beneficial interest in moveable property is capable of being transferred by
assignment evidenced by writing executed by assignor or by his duly authorized agent. However, it
need not be registered
Infringement of Copyright [Section 51-53]
When en without authorization from the owner of act or competent authority under the Act any act is r
'cd out it constitutes infringement of copyright of the work.
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Copyright is infringed when any person
(a)
Without a licence does anything for which the exclusive right is by the Act conferred upon the
owner of the copyright,
(b)
without licence permits for profit any place to be used for the communication of the work to the
public where such communication constitutes an infringement of the right in work.
(c)
makes for sale or hire or sells or offers to sell either by trade displays or otherwise distributes
or exhibits in public or imports into India any infringing copies of the work.
However, bringing one copy of the work for domestic and private use is permitted.
Trade Mark
Meaning
A trade mark means a mark used in relation to goods for the purpose of indicating or so as to indicate
a connection in the course of trade between the goods and some person having the right as proprietor
to use that mark. The function of a trade mark is to give an indication to the purchaser or a possible
purchaser as to the manufacture or quality of the goods, to give an indication to his eye of the trade
source from which the goods come, or the trade hands through which they pass on their way to the
market.
Definition :
'Trade Mark" means a mark capable of being represented graphically and which is capable of
distinguishing the goods or services of one person from those of others and may include shape of goods,
their packaging and combination of colours, and A registered trade mark or a mark used in relation to goods or services for the purpose of
indicating or so as to indicate a connection in the course of trade between the goods or
services, as the caCP maybe, and some person having the right as proprietor to use the mark;
and
(ii) A mark used or proposed to be used in relation to goods or services for the purpose of
indicating or so to indicate a connection in the course of trade between the goods or services,
as the case may be, and some person having the right, either as proprietor or by way of
permitted user, to use the mark whether with or without any indication of the identity of
that person, .and includes a certification trade mark or collective mark.
Procedure for Registration, of Trade Mark
The following arrangements and procedure setting up for registration of trade marks in
India.
1. Appointment of Registrar and other officers- The Central Government appointed a person to
be knows the Controller General of Patents, Designs and Trade Marks. who is the Registrar of Trade
Marks for the purposes of this Act.
The Central Government also appointed such other officers with such designations as it thinks
fit for the purpose of discharging, under the superintendence and direction of the Registrar, such
functions of the Registrar under this Act.
2. Trade Marks Registry and of faces thereof- For the purposes of registration of trademarks
there shall be a trade marks registry and the Trade Marks Registry established under the Trade and
Merchandise Marks Act, 1958 shall be the Trade Marks Registry under this Act.The Central
Government may, by notification in the Official Gazette, define the territorial limits within which an
office of the Trade Marks Registry may exercise its functions.
There shall be a seal of the Trade Marks Registry.
3. Application for registration- For the registration of a trade mark an- application is to be made
to the Registrar. A single application can be made for registration of a trade mark for different classes
of goods and services by paying prescribed fee for each such class of goods and services.
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()
In the case of a refusal or conditional acceptance of an application, the
Registrar shall
record in writing the grounds for such refusal or conditional acceptance and the materials used by
him in arriving
4. Advert isemen t of applicat ion - When an application for at his decision. Registration
of a trade mark has been accepted whether absolutely or subject to conditions or limitations,
the Registrar shall, as soon as may be after acceptance, cause the application as accepted
together with the conditions or . Limitations, if any, subject to which it has been accepted, to be
advertised in
5. Opposition to registration- Any person may, within four months the prescribed manner.
from the date of the advertisement or re advertisement of an application for registration, give
notice in writing in the prescribed manner and on payment of such fee as may be prescribed,
to the Registrar, of opposition to the The Registrar shall serve a copy of the notice on the
applicant for registration.
registration and, within two months from the receipt by the applicant of such copy of the notice of
opposition, the applicant shall send to the Registrar in the prescribed manner a counter
statement of the grounds on which he relies for his application , and if he does not do so he shall
be deemed to have abandoned his application
If the applicant sends such counter statement, the Registrar shall serve a copy thereof on
the person giving notice of opposition.
Any evidence upon which the opponent and the applicant may rely shall be submitted in
the prescribed manner and within the prescribed time to the Registrar, and the Registrar shall give
an opportunity to them to be heard,
The Registrar shall, after hearing the parties, if so required, and if they so desire.
considering the evidence, decide whether and subject to what conditions or limitations, if any. the
registration is to be permitted, and may take into account a ground of objection whether relied
upon by the opponent or not.
6. Registration of Trade Mark- This section makes is mandatory on the Registrar to register
the trade mark where the procedure for registration of a trade mark completed .When an application for
registration of a trade mark has been accepted dismissed and either(a) The application has not been opposed and the time for notice of opposition has
expired; or
b) The application has been opposed and the opposition has been decided in favour of the
applicant.
The Registrar shall. unless the Central Government otherwise directs. register the said trade
mark and the trade mark when registered shall be registered as of the date of the making of the said
application and that date shall, be deemed to be the date of registration.
7. Registration Certificate- On the registration of a trade mark, the Registrar shall issue to the
applicant a certificate in the prescribed form of the registration thereof, sealed with the seal of the
Trade Marks Registry.
The Registrar may amend the register or a certificate of registration for the purpose of
correcting a clerical error or an obvious mistake.
Effect of Registration
No person shall be entitled to institute any proceeding to prevent, or to recover damages for, the
infringement of an unregistered trade mark.
This section provides that no infringement action will lie in respect of an unregistered trade
mark, but recognises the common law rights of the trade mark owner to take action against any
person for passing off goods as the goods of another person or as services provided by another person
or the remedies thereof.
Infringement of registered trade marks
A registered trade mark is infringed by a person who, not being a registered proprietor or a
person using by way of permitted use, uses in the course of trade, a mark which is identical with, or
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deceptively similar to. The trade mark in relation to goods or services in respect of which the trade
mark is registered and in such manner as to render the use of the mark likely to be taken as being
used as a trade mark.
(1) A person shall be deemed to falsify a trade mark who, either,
(a) Without the assent of the proprietor of the trade mark makes that trade mark or a
deceptively similar mark; or
(b) Falsifies any genuine trade mark, whether by alteration, addition. effacement or otherwise,
(2) A person shall be deemed to falsely apply to goods or services a trade mark who, witho ut
the assent of the proprietor of the trade mark,
(a) Applies such trade mark or a deceptively similar mark to goods or
Any person who (i) falsifies any trade mark; or (ii) falsely applies to' goods or services
any trade mark: or (iii) makes, disposes of, or has in his possession, any die, block, machine,
plate or other instrument for the purpose of falsifying or of being used for falsifying, a trade
mark; or (iv) applies any false description to goods or services; or (v) applies to any goods to
which an indication of the country or place in which they are made or produced or the name
and address of the manufacturer or person for whom the goods are manufactured is
required to be applied, a false indication of such country, place, name or address; (vi)
tempers with, alters or effaces an indication of origin; or (vii) causes any of the things above
mentioned to be done, shall be punishable with imprisonment for six months to three years
and with fine of fifty thousand rupees to two lakh rupees.
Patents Act
The present Patents Act, 1970 came into force in the year 1972, amending and incorporating the
existing laws relating to Patents and Designs act 1911 in India. The Patent (amendment) Act 2005 came
into force from 1st January 2005, which brought changes in the previous patent system of India wherein
product patent was extended to all subjects of technology consisting of food, drugs, chemicals and
micro organisms.
Moreover, Section 3(d) introduced in to the said amendment act 2005 and introduces pharmaceutical
product patents in India for the first time. The Patent (amendment) Act 2005 defines what invention is
and makes it clear that any existing knowledge or thing cannot be patented. The provision defines that
a 'novelty' standard - which, along with 'non-obviousness' or 'inventive step' and industrial
applicability, are the three prerequisites for 'patentability'. "Discovery" essentially refers to finding out
something which already existed in nature but was unknown or unrecognised. Therefore, discoveries
are excluded from patent protection under section 3 of the Indian Patent Act 1970.
A patent is termed as the exclusionary rights given by the government or the authorized authority to its
inventor for a particular duration of time, in respect of his invention. It is the part of the intellectual
property right, which connotes with all those rights which are granted to any person for protecting its
invention, process, discovery, composition or new useful development etc. from its further usage
without any authentication.
If more than two persons have jointly applied for patent license, both will own the patent separately.
The original word 'patent' has come up from the latin term 'patere', which means 'to lay open' or
'available for public usage'. Sometimes it is also related to the term 'letters patent', which marks to the
royal decree granting exclusive rights to patentee. Unlike copyright, patent is not granted on giving
mere suggestion or idea. An idea of mere manufacturing machine does not comes under the purview of
obtaining patent.
ADMINISTRATION
The Patent Office, under the Ministry of Commerce & Industry, Department of Industrial Policy &
Promotion, has been established to administer the various provisions of the Patents Law relating to the
grant of Patents & The Designs Law, relating to the registration of Industrial Designs.
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MEMBERSHIP OF INTERNATIONAL TREATIES
India is member of the following treaties governing patents:
 Convention establishing World Intellectual Property Organization (WIPO)
 Trips Agreement under the World Trade Organization.
 Paris Convention for the protection of Industrial Property with effect from Dec. 7, 1998.
 Patent Cooperation Treaty (PCT) with effective from Dec. 7, 1998.
TYPES OF PATENTS
 Ordinary Patent
 Patents of addition
 Convention
WHO CAN APPLY
Application may be made, either alone or jointly with another, by the inventor, assignee, legal
representative of deceased inventor or assignee. The inventor is entitled to be mentioned in the patent
if he applies to do so.
Application may be made jointly by two or more corporations as assignees.
PATENTABLE INVENTIONS
An invention means any new and useful art, process, method or manner of manufacture; machine,
apparatus or other article; or substance produced by manufacture, and includes any new and useful
improvement of any of them, and an alleged invention.
DOCUMENTS REQUIRED FOR FILING AN APPLICATION
 Application form in triplicate.
 Provisional or complete specification in triplicate. If the provisional specification is filed it must
be followed by complete specification within 12 months (15 months with extension).
 Drawing in triplicate (if necessary).
 Abstract of the invention (in triplicate).
 Information and undertaking listing the number, filing date and current status of each foreign
patent application in duplicate.
 Priority document (if priority date is claimed).
 Declaration of inventorship where provisional specification is followed by complete
specification or in case of convention application.
 Power of attorney (if filed through Patent Agent).
 Fee in cash/by local cheque/by demand draft.
Appropriate Office for Filing An Application
Application is required to be filed according to the territorial limits where the applicant or the first
mentioned applicant in case of joint applicants for a patent normally resides or has domicile or has a
place of business or the place from where the invention actually originated .If the applicant for the
patent or party in a proceeding having no business, place or domicile in India., the appropriate office
will be according to the address of service in India given by the applicant or party in a proceeding.
Examination & Publication
All the applications for patent accompanied by complete specification are examined substantively. A
first examination report stating the objection(s) is communicated to the applicant or his agents.
Application or complete specification may be amended in order to meet the objection(s). Normally all
the objections must be met within 15 months from the date of first examination report. Extension of
time for three months is available, but application for extension therefore must be made before the
expiry of normal period of 15 months. If all the objections are not complied with within the normal
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period or within the extended period the application will be deemed to have been abandoned. When
the application is found to be suitable for acceptance it is published in the gazette of India (Part III,
Section2). It is deemed laid open to the public on the date of publication in the gazette of India.
OPPOSITION
Notice of opposition must be filed within four months of notification in the Gazette. Extension of one
month is available, but must be applied for before expiry of initial four month period.
GRANT OR SEALING OF PATENT
If the application is not opposed or the opposition is decided in favour of the applicant or is not refused
the patent is granted or sealed on payment of sealing fee within 6 months from the date of
advertisement. However, it is extendable by three months.
REGISTER OF PATENTS
The Register of Patents will be kept in the Patent Office and its branch offices. Register of Patents can be
inspected or extract from it can be obtained on payment of prescribed fee. Register of Patents contains
full details of the Patent which include Patent number, the names and addresses of the patentee;
notification of assignment etc.; renewals, particulars in respect of proprietorship of patent etc.
RIGHTS OF PATENTEE
A patent grant gives the patentee the exclusive right to make or use the patented article or use the
patented process. He can prevent all others from making or using the patented process. A patentee has
also the right to assign the patent, grant licenses under, or otherwise deal with it for any consideration.
These rights created by statute are circumscribed by various conditions and limitations.
RENEWAL FEE
Renewal fees are payable every year. The first renewal fee is payable for third year of the patent’s life,
and must be paid before the patent’s second anniversary. If the patent has not been issued within that
period, renewal fees may be accumulated and paid immediately after the patent is sealed, or within
three months of its recordal in the Register of the Patents.
Date of payment of Renewal fees is measured from the date of the patent. Six months’ grace is available
with Extension fee. No renewal fees are payable on patents of addition, unless the original patent is
revoked and the patent of addition is converted into an independent patent; renewal fees then become
payable for the remainder of the term of the main patent.
No renewal fees are payable during the pendency of the application for a patent; renewal fees that
become overdue during pendency are payable upon sealing within three months of recordal in the
Patent Register.
WORKING
Annual reports as to the extent of working, by every patentee and licensee, are a statutory requirement
and must be submitted by March, 31 each year for the previous year ending December, 31.
COMPULSORY LICENSE AND LICENSE OF RIGHT
On failure to work a patent within three years from the date of its sealing, an interested party may file
petition for grant of a compulsory license.
Every patent for an invention relating to a method or process for manufacture of substances intended
for use, or capable of being used, as food, medicines, or drugs, or relating to substances prepared or
produced by chemical process (including alloys, optical glass, semi-conductors and inter-metallic
compounds) shall be deemed to be endorsed "Licenses of Right" from the date of expiry of three years
from the date of sealing the patent.
ASSIGNMENT
Applications must be filed on the prescribed form with the Controller for the registration of
assignments and any other documents creating an interest in a patent in order for them to be valid. In
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order to be valid, an assignment must be recorded within six months from the date of the document. A
six-months extension may be obtained.
LICENSE
Applications must be filed on the prescribed form with the Controller for the registration of licenses
and any other documents creating an interest in a patent in order for them to be valid. A license must
be recorded within six months from the date of the document.
DURATION
A patent lasts for 14 years from the date of filing the complete specification (if an application is filed
with provisional specification on January 1, 1989, and a complete specification is filed on January 1,
1990, the duration is counted from January 1, 1990). However, for food, drug and insecticide patents,
the life is seven years from the date of complete specification, or five years from date of sealing,
whichever is shorter.
RESTORATION
Application for restoration of a patent that lapses due to nonpayment of renewal fees must be made
within one year of lapse. If an overdue annuity is not paid within the extension period, the one-year
period for seeking restoration commences from the date of recordal.
INFRINGEMENT
Infringement can consist of taking away essential features of the patented invention; utilizing claimed
features; copying patented substances; mechanical equivalence; taking part of the invention. while the
patent is in force. Use by the government or for government purposes is not infringement. Such use
must be paid for on terms to be agreed upon before or after use. Accidental or temporary use, use for
research, use on foreign vessels, do not constitute infringement.
APPEAL
Appeal lies in the High Court. Appeal must be lodged within three months from the decision of the
Controller.
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